Valuation of Private Companies in Property Settlements

Valuing a business during a family law property settlement in Australia is a multifaceted process that requires careful consideration of various factors to ensure a fair and equitable division of assets. In the context of a property settlement, it's essential to recognize the business as part of the marital asset pool.

This includes businesses owned individually, jointly, in partnership with third parties, or through company or trust structures.  Regardless of the operational structure, if one party has an ownership interest in a business, that business becomes part of the asset pool to be considered in the settlement.

Privately owned companies are not required to file detailed financial statements or disclosures with public regulators (unlike publicly traded companies). Information such as revenue, profits, liabilities, and ownership structure may not be readily available. Financial records provided by the business owner may lack standardization or be incomplete.

There is potential for financial manipulation, such as undervaluing assets or inflating liabilities, especially if one party is reluctant to share accurate data. Private companies don’t have readily available market prices or benchmarks for comparison. Valuation relies heavily on estimations rather than market data, which increases the risk of inaccuracy.

Privately owned businesses often have complex structures (e.g., trusts, partnerships, or subsidiaries), making it harder to assess true ownership and financial standing. Discretionary trusts or hidden arrangements may obscure actual asset values. Unlike public companies, private companies may not adhere to stringent accounting standards. Variability in financial reporting can lead to difficulties in identifying a consistent baseline for valuation.

Another significant issue in business valuations arises when trusts are involved, particularly when the other party is a beneficiary of a trust that has a separate corporate trustee linked to multiple private companies. Trust structures can obscure ownership and complicate the valuation process. The corporate trustee and related entities may resist disclosure, claiming confidentiality or independence from the parties.

Accountants are bound by client confidentiality and may refuse to provide information without explicit consent, unless compelled by legal orders. Business owners may underreport income, inflate expenses, or otherwise misrepresent financial data to lower the business valuation.

It is critical to obtain as much information as possible about the business being valued. This typically needs to be obtained through the lawyers involved, as the other party may be especially hesitant to provide it voluntarily. Full and frank disclosure is a cornerstone of Australian family law settlements, meaning the other party is legally obligated to provide all relevant information. However, if you don’t ask the right questions or request the appropriate materials, the other party is under no obligation to provide them voluntarily. It is crucial to clearly specify the information and documents needed to ensure full and accurate disclosure.

Not all business valuers have the expertise or experience necessary to value a business appropriately, particularly in complex or niche industries. Selecting the right valuer is critical to ensure the valuation is accurate, credible, and defensible in a legal context. Valuers, while skilled in financial analysis, may not fully grasp the relational or legal complexities that influence the true value of the interest. A valuer may focus on standard methodologies without adapting them to the specific legal and relational dynamics of the case.

Valuing a private business is challenging but not impossible. Engaging a lawyer with a finance degree or significant financial expertise is an excellent starting point. A lawyer with financial expertise is better equipped to uncover discrepancies, identify hidden income or assets, and interpret the financial and operational intricacies of private companies. Most lawyers do not receive extensive financial training, which means that the other party's lawyer is likely grappling with similar difficulties. Furthermore, their client has likely not disclosed the full extent of their private company dealings, adding another layer of complexity to the process.

Valuing a private business can feel like navigating a maze—winding paths, hidden corners, and dead ends. Sometimes, all it takes to unravel the complexities is throwing a piece of bait—just the right question or request—and watching as the hidden threads start to reveal themselves!