Important considerations when valuing entities for family law purposes

By Andrew Sauer

When acting for a client seeking information regarding an interest in an entity (that is, companies, trusts and partnerships) held by the other party, concern is often expressed by the client that they wish to ensure that the nature and extent of that interest is properly identified, and that it is included in the calculation of any property settlement at an appropriate value.

Consideration of relevant documents

Before advising the client as to the characterisation of an interest in an entity (such as a partnership, company or trust), it is important to obtain and consider all relevant documents. Appropriate searches, such as ASIC searches, should be conducted to ascertain the other party’s interest in any companies. In relation to ascertaining interests in any other entities, this will need to be done (at least initially) by way of a request for disclosure. Often, the party’s personal income taxation returns will reveal that party’s interest in any entities, as the income those entities pay to that party will be recorded on the taxation returns. Bank statements may also record payments from entities which could indicate an interest in an entity. Various provisions of the Rules of the Family Court of Australia also list some of the documents that should be sought in relation to entities.

Interests in companies

Specifically in relation to companies, ASIC searches will show some of the information required to ascertain the nature and extent of the interest. Constitutions and share registers can also assist. In terms of ascertaining the value of the company, financial statements and taxation returns are of preliminary assistance.

Interests in trusts

Specifically in relation to trusts, the trust deed any any amending deeds should demonstrate the nature and extent of the interest. Whether or not an interest in a trust is property can be a complex issue, and so it is important to consider the trust deed carefully. An interest of a discretionary beneficiary in a trust may or may not be property, depending on whether it is accompanied by some form of control over distributions, and/or regularity of any distributions. Financial statements and taxation returns can assist with ascertaining the value of the trust.

Interest in partnerships

In relation to partnerships, the partnership agreement (if any) and any amending documents should be sought as it will define each partner’s rights. In ordinary circumstances, an interest in a partnership is property, but this is not always the case, particularly not in relation to the interest in a professional partnership, such as a law firm. Financial statements and taxation returns can assist with ascertaining the value of the partnership.

Complexities

Some entities may be straightforward to value. For example, an entity may only hold assets and may not conduct a business, which case the entity may be able to be valued on a net asset basis (the value of assets less the value of liabilities). Other entities, particularly those which conduct a business, may be difficult to value, as the valuation has a number of components, including the assessment of net tangible assets, which may be complicated by taxation or potential liabilities, as well as intangible assets such as goodwill and intellectual property (IP).

Valuers

It is important to ensure that any valuation of an entity (or group of entities) undertaking a business is undertaken by an independent witness with appropriate expertise. It is preferable for the valuer to have previously undertaken valuations of businesses in the same industry.

Interplay between the value of a business and the income it generates

There is a risk of “double counting” when valuing an entity operating a business. The value of such an entity will usually be based on the income it generates. Thus, there is a risk in any Court action to avoid considerations to both the value of the business and of the entire income it generates. Often, a notional salary is deducted from the income of the business in the valuation process, where the party does not take a wage from the business, and in those circumstances, it is appropriate for the notional salary to be relied upon for the purposes of considering income, in conjunction with the value of the business rather than the actual income. This issue has been dealt with in a number of cases including McF & McF and Spengler & Thomas.

Minority Interests

Once an entity is valued, the value of the parties’ interest must be assessed. Often, this is just a case of multiplying the percentage interest the party has by the value of the business. However, in the case of minority interests, a discount may need to be applied to reflect the issues that minority ownership can present.