Business Valuation for a Divorce in New Zealand
In this article, I’ll step through the business valuation process from a divorce perspective. It may be useful to read my general article on business valuation first.
Business Valuation for the Purpose of Divorce
How do you value a business for the purposes of a divorce situation in New Zealand? The business valuation principles remain the same but there are some differences from other business valuation situations.
The courts have said that a valuation is no different an exercise from other purposes and that, “it is essentially a practical question: and which various approaches have been evolved, but they are aids and not to be elevated to the test itself” (Pountney v Pountney).
I think this is a sensible approach given the necessary subjectiveness of the business valuation, compared to a discipline that is more objective.
Please note I’m not providing divorce legal advice, only how to go about a business valuation in relation to divorce, here’s the full disclaimer:
The information contained in this site is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained on this site. Accordingly, the information on this site is provided with the understanding that the author is not herein engaged in rendering legal services. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult a lawyer.
Standard of Value
There are many different opinions on what “value” means, in the valuation world we have three that we commonly use: Fair Market Value, Fair Value, and Investment or Synergistic Value. These are called standards and the first one is most often used by a valuer.
Fair Market Value. Relationship Property law (and business valuation in general) almost always uses Fair Market Value. Law cases provide us with the definition,
“the price, which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have paid for the shares if the vendor and the purchaser had got together and agreed on a price in friendly negotiations”
(Hatrick v Commissioner of Inland Revenue).
“Fair” when applied to “market value”,
“rules out the effects of transient booms or sudden panics in the market. It seeks to find a consistency of the market and thus it is the market that needs to be consistent and not the value.” (Walker v Walker).
Fair Value. Where there are two shareholders in a private company an argument can be made that a different standard should apply called Fair Value.
This removes the hypothetical and replaces it with two identified parties who have to deal with each other and have access to the same level of information about the company.
In New Zealand, and internationally, Fair Value has not been clearly defined and is a problematic term such that it does not even have a definition in the International Glossary of Business Valuation Terms. There is some case law (Fong and Chong v Wong and Fong) that does address it. Perhaps it means that we don’t need to make a minority discount.
Investment or Synergistic Value. This is value to a particular buyer and includes any synergistic benefit they get from the purchase. It’s not relevant to divorce.
Premise of Value
The Premise of Value can be book value, going concern value, liquidation value or replacement value. In almost all cases it is going concern value which is defined as,
“the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained workforce, an operational plant, and the necessary licenses, systems, and procedures in place.” (IGOBVT)
Valuation Date
Officially, the valuation date is the date of the first hearing in court. Yet we need to finalise a valuation before the hearing date. Valuation standards state that a valuer is not to consider anything that happens after the valuation date. This is a dilemma.
In many other jurisdictions, it is the separation date which makes the valuer’s job much simpler which avoids the dilemma.
Various approaches might be used to set the valuation date including
1) end of financial year for the last year
2) separation date
3) as close to the hearing date as possible
4) separation date and hearing date (and possibly a deferred hearing date)
The judge can make redress post the valuation date but I shall leave the legal profession to advise on this and exactly what date to use.
Nature of Subject Interest
The relationship property may be a 20% equity interest (the rest being owned by other non-family shareholders) or a 100% interest in a company. We need to be certain exactly what we are valuing.
If it’s 100% that will be split 50:50 then the pool of interests will be valued not the other parties 50%. Note this means that a Discount for Lack of Control will not be given.
Financial Analysis and Valuation Methods
The courts have said that the valuation is a practical approach, an aid but not a test. Therefore the process outlined in my article Business Valuation in NZ applies.
This process is one of conducting financial analysis, economic and industry analysis, risk analysis and questioning management about financial statements. The future income stream, capitalisation and discount rates will come from these inquiries. Then the different methods in the income, market and asset approaches are applied. Discounts for control and marketability are considered before estimating a final business value.
There are many other matters a lawyer will consider in a divorce situation including economic disparity, companies owned by a trust, separate vs relationship property, and contribution after separation. These may involve a valuer but probably not.
Audit for Divorce Proceedings
A party may well have low levels of trust in the financial accounts and demand an audit. What they actually want is a forensic accountant to trace assets and any diversion of income. This isn’t done by a valuer and can be an expensive task.
Likewise, one party may choose not to provide financial accounts. This can lead to a substandard valuation report full of disclaimers. The report will be based on estimates that may not favour the information-providing party.
One or Separate Valuations
The parties to the divorces can choose to have separate valuers or pay for just one valuation report. In the latter case the parties’ lawyers may jointly engage the valuer, and the valuer would be careful to ensure complete neutrality over the process.
If two valuation reports are done, the valuers could be asked to meet and reach a joint agreement on value (or at least areas of agreement and disagreement).
That’s how you value a business in a divorce situation.
