Conducting valuations in matrimonial disputes: A no-nonsense guide

Divorce is messy, and if a family business is involved, things can get even messier. Determining the value of that business is crucial, whether you're a lawyer representing a client or a party to the divorce, to ensure assets are divided fairly. Whether you're the Chief Executive Officer (CEO) of the family enterprise or someone navigating the complexities of asset division, this guide will demystify the business valuation process and its importance in family law disputes.

Why valuation is critical (and complicated) 

Valuation isn't just about numbers - it's about people, emotions, and, unfortunately, potential conflict. In the context of a divorce, the valuation of a family business plays a critical role in determining how assets are divided between the parties. As the parties to a matrimonial proceeding may wish to retain ownership of a particular asset - whether it’s a business or another type of property - arranging for a valuation is the most reliable way to obtain an impartial assessment of its value without needing to sell the asset. A valuation provides a snapshot of what a business might be worth in a hypothetical transaction - think of it as a financial reality check that could make or break your financial future. 

Why are valuations important? The matrimonial property pool includes all assets, liabilities, and financial resources that need to be divided in a divorce. Without a solid valuation, you could end up with an unfair slice of the pie.

The matrimonial property pool: What’s in the pot? 

In a divorce, the matrimonial property pool includes everything you own and owe. This includes all assets and liabilities and often involves valuing businesses or entities that one or both parties have an interest in.

Valuing a business or entity:

  • What’s involved? If the business is in play, the valuation will be similar to a full financial autopsy. Whether it’s a small consultancy or a multi-million-dollar operation, the structure of the entity (company, partnership, trust) will dictate what gets valued.
  • Why it matters: If you don’t know what the business is worth, you can’t fight for your fair share. Understanding what is being valued is important as it directly influences how assets are divided. Even if you aren’t involved in the business, knowing its value helps ensure a fair settlement. 

The standard of value 

In business valuations for divorce proceedings, the standard of value most often used is market value. This represents what the business would sell for in an open market, assuming a willing buyer and a willing seller, with neither under pressure to act. 

Valuation methods: Which one’s right for your business? 

When dealing with a valuation, engaging and using a qualified and experienced valuer is important to ensure its integrity and credibility, particularly if the matter ends up in court. Before commencing the valuation process, we recommend that parties confer with their legal representatives to ensure any report provided will be appropriate and useful for any legal proceedings that may ensue. 

Valuations aren’t one-size-fits-all. Based on their expertise and experience, the valuer will select the most appropriate valuation method based on the available information about the business. The following methods are commonly used.

  • Market approach: This method compares your business to others that have recently sold.
    • Guideline company method: This is the gold standard - if there’s enough data. We look at similar companies and their sale prices to benchmark your business. But be warned, if your business is unique, this method might not reflect its true value. 
    • Rules of thumb: Quick, industry-specific shortcuts. They’re fine for a back-of-the-envelope estimate but may lead to inaccurate valuations. These rules can offer a quick reference point, however they should not be heavily relied upon unless it can be demonstrated that buyers and sellers in the market consistently use them in actual transactions. Even then, they should only serve as a supplementary check and not replace more rigorous valuation methods. 
  • Income approach: This method considers future earning potential, valuing the business based on its ability to generate future earnings or cash flow.
    • Discounted cash flow (DCF) method: Typically used for family businesses expected to generate cash flows over a long period, or those with variable or unpredictable cash flows. DCF allows these factors to be accurately reflected in the valuation, making it a comprehensive approach for assessing long-term value. However, this method is only as good as the projections used.
    • Income capitalisation method: This method is best for businesses operating at a stabilised level of growth and profits. It’s often used when a business has a stable track record of profitability and provides a straightforward estimate of its value based on its ongoing ability to generate profits. 
  • Cost approach: This is the ‘yard sale’ method - what would it cost to replace everything the business owns? It’s usually a last resort and used when the business’s value is best represented by the value of its assets rather than its income potential. 

Why it matters: The method used to value the business will depend on its specifics, such as its size, industry, financial health, and prospects. The goal is to select the method that provides the most accurate and relevant valuation for the circumstances. 

The importance of timing 

The value of a business can change overnight, whether due to a lost contract, a new competitor, or a market shift. As such, timing can significantly impact a valuation outcome.

Why it matters: Choosing the right valuation date is crucial as it directly influences your financial settlement. The valuation date should reflect the business’s current value, considering any recent changes that could affect its worth. 

What documents are needed?  

A thorough valuation can’t be done on a hunch. It requires a thorough deck of documents - financial statements, tax returns, forecasts, and more. If you don’t have them, it’s crucial to get them.

Below is a list of what’s typically required: 

  • Details about the business: Information on the entity or business being valued, including its structure and operations 
  • Financial information: Financial statements (profit and loss, balance sheets) for the current year and the previous three to four years 
  • Tax returns: Tax returns for the last four financial years 
  • Accounting software access: Access to the business’s accounting software, including payroll data 
  • Budgets and forecasts: Any future financial projections or budgets that have been prepared 
  • Related party transactions: Details of any transactions with related parties, such as leases or loans with non-arm’s length parties
  • Uncommercial transactions: Any transactions that were not conducted on typical commercial terms. 

Why it matters: These documents provide the valuer with a complete picture of the business’s financial health, ensuring that the valuation is based on accurate and up-to-date data. Even if one spouse doesn’t have direct access to these documents, the legal team can request them on their behalf.

The valuation process: What to expect 

The valuation process might sound straightforward, but there’s a lot more happening behind the scenes. Below is an overview of the process, carried out across four key stages:

  • Initial consultation: The valuer will discuss the needs of both parties and gather preliminary information about the business, including family dynamics
  • Document collection: Gathering the necessary financial documents and details about the business operations
  • Analysis: The valuer crunches the numbers, analyses the information, and applies the chosen method of valuation 
  • Valuation report: The valuation figure - along with a comprehensive report and explanation as to how the valuation was determined and what it means for both parties. If you don’t understand it, ask questions. This report could decide your future. 

Why it matters: Understanding these steps can help both spouses feel more confident and prepared throughout the valuation process. The valuer’s role is to independently assess the business’s value, providing a neutral perspective. 

Transparency

An important part of the valuation process is being able to ask questions of the business operator who is often one of the parties involved. It’s essential that both parties are included on all correspondence so that each party can see no particular influence has been placed on the information provided to the valuer. 

What if you’re in the dark?

Don’t have access to the documents? Feel like you’re out of your depth? You’re not alone. Valuers are used to working with limited information and are there to help.

Why it matters: Assumptions aren’t your friend. If you’re missing critical data, the legal team can request them on your behalf. The accuracy of the valuation - and your settlement - depends on it.

How BDO can help

Valuations in divorce are complex, emotional, and sometimes contentious. But with the right preparation, understanding, and a bit of persistence, you can ensure the outcome is as fair as possible. Whether you’re deeply involved in the business or have little knowledge of its operations, our valuation experts aim to make the valuation process straightforward and transparent.

For more information on how we can assist with your matrimonial valuation needs, contact us.