In Family Law proceedings pursuant to the Family Law Act 1975, the value of a company is usually determined by an expert valuation, unless the parties are able to agree to the value of the said company between themselves. Valuation involves determining the fair market value of the company, which normally takes into account factors such as the company's assets, liabilities, revenue, expenses, and potential for future growth.
The Court would often appoint an impartial expert (valuer) to conduct the valuation and present a report to the court. The parties usually share the costs of such report. A party with limited resources may be able to seek an order from the Court that the other party pays the full cost of such valuation report in the first instance, on the condition that the non-paying party shall reimburse his or her share of the costs to the other party at the conclusion of the matter.
Upon obtaining the valuation report, the value of the business will then be considered by the Court and taken into account when dividing the parties' assets.
To calculate the company's value, the independent valuer would usually employ one of the following methods:
1. Asset -Based Approach
One of the most widely used techniques for valuing a business is the asset-based approach, also known as the value of nett tangible assets. This strategy entails determining the value of all the company's assets, including real estate, machinery, supplies, and intellectual property. The business's nett asset value (NAV) is then calculated by subtracting the value of the liabilities from the value of its assets.
When determining the value of companies with a sizable amount of tangible assets, this approach is particularly helpful. However, it does not account for the company's earning potential or the value of intangible assets like goodwill, intellectual property, and customer relationships.
2. Capitalization of earning method
Another popular approach to valuing a business is the capitalization of earnings method (also known as capitalization of future maintainable earnings method), which entails estimating future profits for the company, discounting them to their present value, and then capitalizing the result. This approach is advantageous when the company's future revenue stream is predictable, and the appraiser has a good idea of what the business will earn in the future.
Based on the risk profile of the company and the sector it operates in, the capitalization rate used in this method is determined. The capitalization rate rises in direct proportion to risk, lowering business value.
3. Discounted Cash Flow method
Unlike the capitalization of earnings method, the discounted cash flow (DCF) does not ignore the time value of money, The process used in this method entails estimating the future cash flows of the company and then using a discount rate to reduce those cash flows to their present value.
The business's risk profile and the sector it operates in are typically taken into account when determining the discount rate to be used in this method. The discount rate and business value usually decrease in proportion to risk.
If you or your former partner has a substantial interest in a company and you are unable to reach an agreement regarding the value of such interest, we recommend obtaining independent legal advice from our experienced family lawyers as soon as possible. This is because extreme care must be taken in appointing and instructing the right independent valuer, and the method of valuation used must be appropriate and suitable in the circumstances for it to be acceptable by the Court.