Valuations and Family Law

The issue of valuing businesses and minority shareholdings in closely held family companies is an interesting area for valuers preparing a valuation for use in Family Court proceedings.

When a practitioner is asked to place a value on a business or a minority interest in a family company, the immediate thought is market value of the interest in question is represented by:

“the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, acting at arms-length.”

The above definition assumes a number of factors, namely;

i) There is a market;
ii) The market is open and unrestricted;
iii) Both the buyer and seller are knowledgeable.

Such an approach is generally taken where a business or shares in a company are being sold to an arms-length purchaser who, during the transaction, would carry out their own due diligence and assessment in arriving at what they consider to be a fair value. This value is then translated into the price that they are willing to pay.

However, in the context of Family Court proceedings, the Court has held that what needs to be established is the value to the owner. This concept of value to the owner was put forward in Reynolds and Reynolds [1977] FLC 90-728 where the full Court said at PP80,111:

“We are doubtful, however, whether valuation methods which have been developed for commercial purposes are entirely appropriate for the purposes of Family Law. Present commercial capital value of shares in a proprietary company may not reflect their value to the spouse who either has control after the divorce or stands ultimately to benefit from them or control them after the death of generous parents, as appears to be the case here.”

In Hull & Hull [1983] FLC 91-360 Nygh J determined what was appropriate with respect to the wife’s shares in a family company. In his reasons His Honour maintained that the “rule in Spencers’ case is only applicable where there is a ready and available market as it is artificial to adopt such a basis for valuation for interests in private companies”. In such a case, the Court has the objective of valuing the shares at a realistic value to the holder.

It was held in AJW and JMW [1998] FAM CA 2377 “where there is a market for shares, market value may well be the same as “value to the owner”. Ramsey and Ramsey [1997] FLC 92-742 but where there is no market, it is something of a “non-sequitur” to seek to ascertain “market value” as the objective of the valuation.” (non-sequitur = an illogical conclusion)

The concept of value to owner has also been applied by the Courts in the case of professional partnerships. This is arrived at by capitalisation of super profits (being the profits generated by the practice after deducting a commercial salary for each of the partners). In our opinion, there is no reason generally, why this approach should not be applied to partnership businesses across the board. See Best and Best [1993] FLC 92-418. However, there may be circumstances that dictate a different approach.

Recently we prepared a valuation of a business that was operated via a partnership between husband and wife. The business operated on the basis that the husband did all the physical work and the wife’s role was to look after all secretarial duties including bookkeeping, paying creditor accounts, collecting debtors, etc. We were advised that representatives of the husband were of the view that the business held no value and representatives for the wife thought there was some value but were not in a position to quantify it.

On face value, there was no ready market for the business to be sold, and as such, very little if any value could be attributed to the business, if it was being valued on the basis of a “willing but not anxious seller and a willing but not anxious buyer” basis. However, the question to be asked is “Does the business hold any value to the partners personally?”. Particularly, in this case, the question was “Is there any value to the husband who was continuing to operate the business post separation and was going to do so indefinitely?”. The approach taken by us in this case was to use the capitalisation of super profits methods to determine what value the business may have to the Partners. The end result was that after deducting appropriate salaries for both husband and wife the business was generating a healthy profit which resulted, in a significant value being attached to the business.

It is the role of the expert witness in preparing valuations for Family Court proceedings to assist the Court in determining what the ultimate value of the business or shares in a company is. It is open to the Court to substitute its own value for that tendered by one or more experts. This point is illustrated in Clarkson and Clarkson [2008] FAMCA 1098 where it was said at Para 200 “McGregor v McGregor [1996] FLC 92-710 Moore J in assessing the husband’s interest in various corporate entities found a valuation methodology to be appropriate, but Her Honour could not accept the valuations as one was too high and the other was Nil. As a consequence, Her Honour adopted the appropriate valuation methodology but came to a more conservative result. On appeal, the Full Court noted at 83,531 that Her Honour had “to use the words in Milledge’s Case (at 162) she made a commonsense endeavour after consideration of all the material before the Court, to fix a sum satisfactory to the mind of the Court.”

Thus, the role of the expert in providing valuations for use in Family Court proceedings is to assist the Court to arrive at a fair and reasonable value of a business or shares held in a company. The Court may accept and/or reject expert evidence and/or substitute its own assessment of value.

The objective of valuations for Family Court proceedings is to ascertain the value of a business or shareholding to the party who will continue to enjoy the benefits of ownership post settlement, notwithstanding the fact that there may not exist a market for the interest being valued.

Thus, the objective in determining value is vastly different to that of a commercial buy/sell transaction where a market for the interest being valued actually exists.

This article was written by John Dickie who has experience in preparing valuations for Family Law matters, buy/sell and dispute resolution matters. Should you need assistance with business or share valuations we are able to assist you.