Business valuation and its importance during a marriage or de facto relationship breakdown
If you own a business and your marriage or de facto relationship has broken down, a business valuation will be a key component in negotiating a property settlement with your former partner. A business valuation will ensure an appropriate and reliable value is allocated to the business in question. This may be your business, your former partner’s business, or a joint business you operated together. A valuation will be based on the business’s profits, assets, and other relevant indicators. The business is often compared to similar businesses in the industry.
Business valuations arm you with the information needed to achieve a pragmatic and reasonable property settlement.
In most cases, one party will want to keep the business with a view to continuing to make money from it.
If your former partner wants to keep the business, it may be in their interests to claim the business is not performing as well as it actually is. A business valuation will provide a clearer picture of its assets and profitability.
On the other hand, if you want to hold on to the business, a valuation will give you confidence that you are giving the full picture to your former partner. This will allow for smoother negotiations and settlement proposals.
It is important to engage an expert valuer, not just the accountant for the business or an employee with knowledge of its financial position. This is because, if you end up going to court, the valuation must be done by a valuer with “specialised knowledge based on their training, study or experience”. Before appointing a valuer, it is best to ask if they have experience in doing business valuations in family law cases. You can expect that a valuer with this experience will know that they must produce a valuation report that meets family law case standards and they may need to give evidence in court.
In general terms, you and your former partner are required to agree to use a certain valuer, and provide him or her with joint instructions. If you disagree on the approach adopted by the jointly engaged valuer, or if there are reasons specific to your case that a joint valuer cannot be engaged, you can ask the court to each use separate valuers.
The court will usually only allow separate valuers if there is a good reason. For example, if the jointly engaged valuer didn’t have all the information about the business or if the valuation was done in a way that is different to standard practice, the court will consider separate valuers.
Both parties’ lawyers should write to the valuer to make a formal request for a valuation. The request should include a background to the business and provide relevant documents such as:
- tax returns and financial statements;
- contracts for future projects or revenue; and
- renewals of any supply or service agreements.
The request should also offer to provide any other documents the valuer needs.
If you and your former partner disagree on certain aspects of the business, the letter of engagement to the valuer must explain what you disagree on and why you disagree.
You and your former partner will generally share the cost of the valuer. However, if you disagree on aspects of the business you may want to negotiate how much each of you pays. This is because if only one of you wants to provide certain instructions to the valuer, those instructions could significantly increase the cost of the valuation.
The valuer will provide a report on the value of the business. The report will also explain how they have reached that value. For example the value may be based on a multiple of the business’s future maintainable earnings or its net assets. If you use a second expert, they will produce their own valuation report. It may be the same, similar, or completely different to that provided by the first expert.
In family law cases, “non-compete” or restraint of trade agreements are becoming more common in property settlements involving businesses. A non-compete agreement stops one party from setting up a similar business within a designated radius of the original business or for a prescribed time period. These agreements can be very important if you and your former partner built and ran a business together that only one of you will retain going forward. A non-compete agreement can protect the value of that business by preventing customers or suppliers being lost to the exiting partner.
If you would like to discuss a business valuation or any other family law related issue, please contact a member of our family law team.
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.