Valuing a business or company shares is one of the most technically demanding aspects of a property settlement. Unlike real estate, there is no comparable sales register. Unlike a superannuation balance, there is no member statement. The value of a business depends on financial performance, goodwill, market conditions, and often the very presence of the person who built it — and each of those factors is open to genuine dispute.
Who values the business?
Business valuations in family law matters are conducted by qualified business valuers, typically forensic accountants with experience in family law instructions. Each party may commission their own valuation, producing a range of values that may differ substantially. Where the gap cannot be bridged by negotiation, the court may appoint a single expert valuer, or hear competing expert evidence and prefer one over the other.
Common valuation methodologies
The appropriate valuation method depends on the nature of the business. Common approaches include:
• Capitalisation of earnings — the most common approach for established businesses; a multiple is applied to the maintainable earnings of the business
• Net asset value — used where the business holds significant tangible assets, or where goodwill is limited
• Discounted cash flow — used for businesses with projected future cash flows that don’t yet appear in historical accounts
• Market-based approaches — where comparable transactions provide a reference point
The personal goodwill problem
A common and contested issue is the distinction between business goodwill (which attaches to the entity and has value to a buyer) and personal goodwill (which attaches to the individual and evaporates on their departure). A medical practice with a loyal patient base built on the personal reputation of the treating doctor may have limited transferable goodwill. The court and valuers must assess what a willing buyer would actually pay, and personal goodwill that cannot be sold is often argued to have no property value.
Questions to consider
• Has a business valuation been obtained, and does it use a methodology appropriate to this type of business, or is there a significant risk the methodology will be challenged by the other side?
• What documents will the valuer need access to — tax returns, financial statements, management accounts, shareholder agreements — and is there a risk of obstruction or incomplete disclosure from the party who controls the business?• Is there a meaningful argument that much of the business’s value is personal goodwill that cannot be separated from the individual, and how would that affect the asset pool calculation?