Property Settlement - Property Time Lines

There are a number of factors to be taken into consideration when valuing a business for family law purposes for this reason valuation methodologies vary depending on the type of business being valued.  There are three organised methods of valuation that are regularly used in the Family Court in determining the value of a business for property settlement purposes they are:

  • Capitalisation of estimated future maintainable dividends;
  • Net present value of future earnings;
  • Capitalisation of future maintainable earnings; and
  • Net asset backing.

Capitalisation of estimated future maintainable dividends

Capitalisation of future maintainable dividends is generally most appropriate to value a minority interest in a business.  The holder of the minority business usually not in a position to influence the flow of dividends, the reinvestment of any income back into the business or the strategy or policies governing the operation of the business.  The value of the minority interest rests with the right to receive dividends.  

The capitalisation of estimated future dividends methodology is not frequently applied to the valuation of shares and private companies for the purposes of family law property settlements because private companies invariably have inconsistent earning patterns which are often driven by tax consequences.  This methodology is most appropriate where the owner of the interest in the business has no real influence over business operations, the earning patterns in the past has been relatively consistent and is expected to continue in the same manner into the foreseeable future.

Net present value of objected earnings

The net present value of future income approach values the future cash flow stream from a project or investment and discounts those cash flows to obtain the present day value.  In layman’s terms the future amounts of income are reduced to take into account inflation to work out what that income is worth in today’s dollars and the value of the business is the total of all future income it will produce into today’s dollars.

This method allows of fluctuations in the future performance of the business and is normally applied to projects with a known life span such as a business based upon a particular piece of technology, patent or fixed term contract.  

To be affecting for longer term investments, reasonably reliable cash flow projections are required.  Reliable cash flow projections beyond 12 months, are not usually prepared for smaller businesses.  The discount in cash flow approach is therefore not generally applied in family law property settlement proceedings.  

Capitalisation and estimated future maintainable income

This method is one of the most common methods applied in valuations for family law property settlement proceedings in the Family Court.  The method is appropriate for the valuation of a controlling interest in a liable ongoing business.
The business must have a history of earnings on which abridgement of future profit can be based.  Businesses with low profitability or erratic past performance would not ordinarily be valued with this approach.  

This method requires consideration of the following factors:

  • Determination of the future maintainable earnings of the business and any factors likely to affect the future operating performance of the business;
  • Identification of profits or losses arising from any assets surplus to the operation of the sustainable business with such profits or losses being eliminated from the business results;
  • Selection of an appropriate earnings multiple having regard to the market rating of compared companies or businesses.  (if you would like more information in relating to earning multiples please do not hesitate to speak to one of our solicitors who can advise you further).
Net asset backing

The net asset backing approach is often the primary valuation technique used where a business is not making profits or the cash flow being yielded from the assets of a business is less than that which could be earned if the assets were sold and the proceeds of sale was invested.

The approach involves valuing each of the assets and liabilities of the business.  The value of the business using this methodology would then simply be the result if all of the assets were added and the liabilities deducted.

Given that the valuation of the assets is at the heart of this methodology care needs to be taken to ensure the basis of the valuation of each of the individual assets is appropriate.  That is to say the assets should be valued as if they were to be disposed of in an orderly fashion rather than in a fire sale.

Other Considerations

In family law proceedings a Single Expert Valuer is required to give consideration to each of the above valuation methodologies and will usually adopt the methodology providing the highest result as being the appropriate value for the business.

Industry bench marks or rules of thumb are often widely quoted by business owners or business brokers however these rules of thumb not withstand the scrutiny required in a family law property settlement context.  As part of the process of valuing a business in that they can be applied as a cross check or guide as to the accuracy of one of the formal valuation methods mentioned above.  

Valuing goodwill is always a contentious issue in family law property settlement proceedings.  A distinction must be drawn between personal goodwill which is the goodwill as a result of know how and contact which may follow a particular business owner or business goodwill which is associated with contracts, methodology and reputation which may follow a business rather than the owner.  In small businesses which revolve around a single person having significant personal goodwill often did not have any significant market value if the business were to be sold.  Other factors to be taken into account in valuing a business include the taxation consequences of a sale, the effect of any loan accounts within a business, the value of an intrinsic benefits flowing to the owners of the business in addition to income and the value of any personal guarantees provided by the owner of the business.  

Should you wish to know more about Property Settlement - Property Time Lines, or would like legal representation, please call Armstrong Legal on 02 9261 4555.

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