Family Owned Businesses - What happens in a divorce?
Making the decision to separate or divorce is difficult for any couple, but for those who also own a business together that decision can be even more complicated. Whether the business is a small trade-based firm, or a large manufacturing business, the issues are the same:
- How can we separate the finances and 'untangle' our financial relationship?
- Does one partner have to 'buy out' the other? How much would that cost?
- Who gets what in the property settlement, especially if we have both worked hard to make the business a success?
- What about future earnings from the business?
Separating the Finances
An important step in any separation or divorce is to determine a property settlement , that is, to work out what assets the couple own and how they can be divided in a fair and equitable manner.
Working out what is included in that asset pool is relatively simple for many couples who might own a family home, and have cars, furniture, jewellery and money held in bank accounts or term deposits for example. However, when a business is involved, it can be difficult to work out both the value of the business now and what the potential future value might be.
Until a value is agreed upon, negotiations might be difficult and it will be hard to determine a fair settlement.
What happens if you can't agree on a value?
In property settlement matters where the parties cannot agree on a value for their interest in a business, it may be necessary to appoint an independent valuer who would be able to provide an accurate estimate of what the business is worth.
Valuations can be quite expensive (ranging from around $3000 for a small business), however it is possible to appoint one single expert witness to value the business. This person must be agreed upon by both parties, and the costs of the valuation may be shared.
How is a business valued?
The most important thing to remember is that when a business is valued for the purposes of a property settlement, it is not the same as the value a business would be sold for. In a property settlement, the valuation looks at the value to the owner, in other words, what are the benefits that the owner would receive if they retained their interest in the company?
The characteristics of all businesses vary, so there is not one set method that is used to value a business. Instead there are a number of methods open to valuers, and they will choose the one that best suits the business in question.
The valuer will consider things such as whether a business is ongoing or if it's operating activities have stopped, whether the earnings of the business are stable or whether they fluctuate from year to year, and whether the business has any "goodwill". Goodwill is treated like an asset, and can include things like the reputation or the location of the business.
When valuing a business, the valuer can look at either the assets and liabilities or the cash flow of the business. The most commonly used methods are;
- Discounted cash flow - this is used for businesses where future earnings can be accurately predicted. It involves estimating the future cash flow of a business then discounting that amount to factor in things such as inflation, interest rates and the risk that future earnings may not eventuate.
- Capitalisation of future maintainable earnings - this is similar to the method above, but, like the name implies, is a more complicated approach! It is mainly used in businesses where earnings are relatively stable and the valuer will look at future earnings, growth opportunities and goodwill as well as taking into account risk and variability of earnings.
- Net realisable assets - this method looks at the total assets and liabilities of a business and works out the value of a business based on the profits that would be made if it was sold.
An independent valuation would be calculated using the most appropriate method and would take into account all of the necessary information.
When a business valuation has been determined
Once the valuation has been performed, it can be used by the parties and their lawyers in property settlement proceedings. In most cases, it will help to facilitate negotiations between the parties and may allow them to reach a property settlement.
If an agreement cannot be reached, and the property dispute is referred to the Court, the valuation may also be used by the Court to assist in determining the outcome.
If you need more information, or would like to discuss business valuations from a family law perspective, call the experienced team at Lamrocks Solicitors on ph: 02 4731 5688.