When a relationship breaks down and the task of dividing the joint assets starts, it doesn’t take long to realise it will be a hard-hitting and difficult exercise to achieve. This is because there are different types of assets, some of which the dollar value is not known, resulting in arguments along the way while each party tries to fulfil their own expectations. On top of this, there are family law provisions to abide by and trying to achieve a fair split of assets is almost impossible when trust is low, emotions are fragile, and both are easily fractured.
When there has been a long marriage, the divorcing couple’s major joint assets usually consist of bank accounts, motor vehicles, the matrimonial home, holiday and/or investment property, public company shares and, often, the family business. Key to a fair property division is placing a value on each asset… which is difficult amongst warring parties. For most of these major assets, there are already established and mature markets that can provide accurate values. For example, cars are valued using the “Red Book”, public shares have their market value listed on the Australian Stock Exchange and real property can be valued by real estate agents using property sales of similar houses in the same neighbourhood. However, there are limited geographic locations where businesses are regularly (if ever) bought and sold that are identical to the family business; leaving the value wide-open. Additionally, each business has its own unique offering and value proposition making it a ‘one-of-a-kind’ so, arriving at a value for the family business is especially challenging without specialist help.
Without doubt, each party in the divorce is going to have a different idea of value for the family business. As each party is trying to maximise their take-away from the split, the business is often used as a vehicle to achieve that motive. For example, the party that ran the business will under value it, and the opposing party (not involved in the business) will inflate the value… and no amount of mediation or negotiation will resolve the issue. If neither party wishes to continue with the business, it can be sold with proceeds easily split since there is no dispute in the value of cash. In most instances, the family business is not sold because it is the only source of ongoing income for one of the parties. In these situations, a valuation is needed.
To save costs, there is a risk the parties themselves will attempt to value their business using an industry ‘rule of thumb’ method. Alternatively, the items on the business balance sheet (such as cash, debtors, plant and equipment) are individually valued. These methods are unsatisfactory and misleading. To arrive at a proper value, you will need a specialist. Business valuations can be carried out by an accounting firm that specialises in that field, like us. A full valuation incorporates industry and market research together with an analysis of the businesses historical and forecast financial information, and accountants are well credentialed to do this. This approach provides a truer value.
If the divorcing parties can agree to hire one valuation expert it will save money. Also, by using a firm that is not associated with either party, the resulting valuation will not only be independent (rules specialists must adhere to) and it will be seen to be independent leaving no scope for anyone to
claim bias.
Written by Chieftains an accounting firm that performs business valuations designed for use in severalcircumstances such as purchase or sale of a business, management buy-outs, divorce settlements, commercial disputes, insolvency or determining value for business succession planning.