When a relationship breaks down, valuing a business can be one of the most high-stakes and complex aspects of a property settlement. With around 70% of Australia’s more than 2.66 million businesses being family-owned, business assets are often the largest portion of the pool of property to be divided.

The importance of proper business valuations

When determining a Family Law property settlement, the Family Court takes into account each party’s direct and indirect contributions.

In the 1991 case Turnbull v Turnbull, the Court ruled that shares in private family companies should be valued based on their worth to the owner rather than what a buyer might pay.

In the 2006 case of Scott & Scott, the Court highlighted that valuations should include benefits unique to the owner, such as personal goodwill. Goodwill refers to the intangible value a business holds, such as its customer relationships, reputation, or the owner’s personal connections that contribute to its ongoing success. Personal goodwill is tied to the business owner’s reputation and skills, which aren’t captured by traditional market value.

These cases highlight the importance of considering tangible and intangible aspects when valuing a business in family law proceedings.

Common Methods of Business Valuation

Future Maintainable Earnings (FME) Method

The FME method, often called the income method, assesses the future earning potential of a business. Valuers examine:

• Business Strengths: Special features of the business, such as a prime location, valuable contracts, or unique equipment, are evaluated.
• Capitalisation Rate: A risk factor, or ‘cap rate,’ is applied based on income stability. For example, a doctor’s practice with a 20-year history may have a lower cap rate of 2-3, while a new retail shop might have a higher rate of 4-5 due to higher risk.
• Regular Earnings: The business’s normal income is analysed by removing unusual one-off payments (such as insurance payouts) to determine consistent yearly earnings.
• Future Challenges: Potential factors that could impact future profits, such as new laws or technological advancements, are considered.

Asset-Based Valuation Method

This method calculates the value by summing all assets owned by the business and subtracting liabilities:

• Working Capital: Outstanding customer payments, stock values, and cash reserves are assessed.
• Physical Items: Property, stock and equipment are valued at current prices, rather than their original purchase cost.
• Intellectual Property: Intangible assets, such as recipes, trademarks, or exclusive selling rights, are included.
• Liabilities: All debts, including staff entitlements, loans, and anticipated tax bills, are subtracted.

Market Comparison Method

Also known as the Market-Based Approach, this method compares the business to similar ones recently sold:

• Industry Standards:
  • Sales of comparable businesses are reviewed, with adjustments made for differences in quality and size.
• Revenue Multipliers:
  • Differences in profitability among businesses with similar sales are considered.
• Location Impact: The effect of location on value is factored in, such as the difference between a shop in a quiet suburb and one on a busy main street
• Market Timing: The impact of market changes since other businesses were sold is taken into account.

Professional Requirements

Expert Qualifications

Professional valuers must demonstrate:

• Relevant professional certifications such as Certified Practicing Valuer or Chartered Accountant qualifications establish technical competency.
• Specific industry expertise demonstrated through prior experience valuing similar businesses in the sector.
• Independence from both parties, including no prior business or personal relationships that could suggest bias.
• Current knowledge of relevant Family Court decisions affecting business valuations.

Documentation Standards

Essential business records include:

• Three years of detailed financial statements showing seasonal patterns and operational trends.
• Business Activity Statements and Tax returns demonstrating reported income and compliance.
• Employee records including entitlements, contracts and key person dependencies.
• Asset registers with purchase dates, maintenance records, and depreciation schedules.

Special Considerations

Family Business Factors

Important considerations include:

• Unpaid family work contributions such as weekend assistance during peak periods and after-hours bookkeeping.
• Succession planning implications, particularly where children are involved in the business.
• Business relationships that may be impacted by family separation, such as key customers with personal loyalties.
• Personal guarantees given by family members for leases or business loans that affect risk assessment.

Here to Help

At Mid Mountains Legal, we understand the complexities of business valuations and can guide you through the process. We work closely with financial experts and valuers to ensure that your business interests are properly assessed. Contact us now for expert guidance and comprehensive support with initial valuations, negotiations, or court proceedings.