About to go through a separation but have no idea how to value a business?
The definition of “value” in the Macquarie Dictionary is:
“The regard that something is held to deserve; the importance, worth, or usefulness of something.”
The problem arises here because what’s valuable to me and what’s valuable to you could be completely different. It is for that reason that there are different methodologies for valuing different businesses depending on what type of business it is.
The four methods of valuation in the Family Courts are:
1. Capitalisation of estimated future maintainable dividends – this method is often used when you have a minority interest in a business and you’re not able to influence the flow of dividends or how the business is run. Simply put, you’ve got no rights in the business other than receiving dividends if the decision-makers decide you are to receive any.
2. Net present values of future earnings – the majority of business valuations in Family Law matters relate to small businesses. This method requires reasonably reliable cash flow projections, and generally cash flow projections beyond twelve months are not prepared for small businesses. Accordingly this method is generally not often used in Family Law proceedings. However, to put it simply, this method requires the projected future earnings to be discounted by inflation to obtain a present value for the business.
3. Capitalisation of future maintainable earnings – No doubt the most commonly used valuation in Family Law. This method is used when there is a controlling interest in a business. It requires identification of profits or losses arising from any assets surplus to the operation of the sustainable business with such profits or losses being eliminated from te business results. involves selection of an appropriate earnings multiple having regard to the market rating of compared companies or businesses.
4. Net asset backing – this method is usually used when the business holds property or other assets and the assets do not generate an income, or a very low income. The valuation would simply be the assets minus any liabilities of the business.
It is important to understand each method and what method should be used to value the business. It could very well make a difference of a couple of hundred thousand dollars in the asset pool to be split up.