Valuations for Family Law Purposes – Common Issues

The first step in any family law property settlement is to identify and value the assets belonging to each party.

A business is an asset and its value either needs to be agreed upon between the parties or valued by a qualified expert.

Different businesses will require different methods of valuation. All are complex and require specialised advice from an expert valuer before a value can be prescribed. 

This article outlines examples of common issues we encounter in our business valuations for family law purposes.

Capitalisation of Future Maintainable Earnings valuation methodology – When to adopt?

The Capitalisation of Future Maintainable Earnings (“FME”) methodology is appropriate only when:

• The assessed FME of a business is positive, regular, maintainable, and sufficient to justify a value exceeding the value of the underlying assets; and
• The assessed Equity Value of the business exceeds the business’ net tangible assets (“NTA”) value, or alternatively, the assessed Enterprise Value of the business exceeds the business’ net tangible business assets value.

In the event the Capitalisation of Future Maintainable Earnings is not an appropriate methodology, and in the absence of long-term financial forecasts/ budgets, the Expert would consider adopting the NTA on a going concern methodology.

An entity with an assessed net asset deficit position – Should the Fair Value be $nil or the net asset deficit?

For a company limited by shares, the normal valuation practice would be to adopt a value of $nil in circumstances where the company has net liabilities, on the basis that there is no personal liability for the net liabilities in the company.

However, to the extent that there is some evidence that the Parties will be personally liable to meet the debts of the entity, the inclusion of a negative valuation would be appropriate for family law purposes.

Matters that may make the Parties personally liable for the debts may include:

• Personal guarantees given on liabilities (generally bank financing); or
• Under certain circumstances, where the entity has continued to trade whilst insolvent.

Amounts outstanding between the entity/trust and the Parties at the Valuation Date

It is common for an entity/trust to have outstanding amounts due to or from the Parties at the Valuation Date. These outstanding amounts could relate to, inter-alia, loans received/given, or beneficiary entitlements payable/receivable.

An amount due to the Parties

An amount due to the Parties represents a personal asset of the Parties and a liability of the entity/trust. In the event the Expert’s valuation of the entity/trust has incorporated the liability, the amount should be added as an asset in the assessment of the matrimonial net asset pool. Alternatively, the liability could be added to the Expert’s assessed Fair Value of the entity/trust.

An amount due from the Parties

An amount due from the Parties represents a personal liability of the Parties and an asset of the entity/trust. In the event the Expert’s valuation of the entity/trust has incorporated the asset, the amount should be added as a liability in the assessment of the matrimonial net asset pool. Alternatively, the asset could be deducted from the Expert’s assessed Fair Value of the entity/trust.

For more information

If you require further information on valuations for family law purposes, please contact your local RSM office.