When to Value a Company – Part 6: Determining the Value of Family Assets in a Divorce Proceeding
There are many stages throughout a company’s life cycle where a business valuation might be helpful, or even required by law. These include the following situations, among others:
- Raising capital to fund your new venture
- Expanding the business with equity capital
- Attracting and retaining talent by issuing shares or options to key employees
- Buying out a shareholder to settle a dispute about how the company ought to be run
- Reorganizing share capital to achieve tax planning objectives
- Determining the value of family assets in a divorce proceeding
- To assist with planning your exit strategy for retirement
- To evaluate an unsolicited offer to purchase your business
- Purchasing a business at its true value
This article is the sixth part in our ongoing series that describes common circumstances that give rise to the need for some sort of valuation. In these articles, we convey some of the key valuation issues that should be considered in each situation.
In this sixth installment, we discuss how valuation is used to support the value of a family asset in a divorce proceeding.
When one spouse owns a business, it is considered as “family property” to be split between both spouses in the event of a separation. A valuation report is frequently required to assess the value of the business to settle such matrimonial disputes. There is an exception to this, however, when the parties are able to mutually agree on the value of an asset amongst themselves.
Once the need for a valuation is determined, legal counsel for each of the spouses will need to agree on who will perform the independent valuation, as both parties will have to agree to accept the outcome. Almost always, they will request a business valuation to be prepared by a Chartered Business Valuator.
In cases where the business existed prior to the date of marriage, only the increase in value that occurred during the marriage is considered part of family assets. Therefore, it is not uncommon to require a valuation at the start of the marriage, to establish a base for the future. Performing a retrospective valuation of the business, however, may pose a challenge, due to difficulty obtaining historical financial statements.
The Valuation Process – Best Practices
The Family Law Act requires a principal valuator be jointly retained by both parties and their individual legal counsel involved in the dispute. The advantages of such a joint valuation engagement include:
- Impartiality – There is a stronger perception of independence and fairness if both parties consider themselves to be the valuator’s client1. For example, the valuator cannot accept instructions or alterations coming from only one of the parties – both would need to agree on all key engagement terms (i.e., the valuation date, the type of report, etc.)
- Transparency – A joint engagement provides greater transparency in communications. Both parties to the dispute have to be copied on all correspondence with the valuator. In particular, both parties would be made aware of what information each is providing the valuator, thus reducing chances of misrepresentation or manipulation.
- Cost savings – Using a single valuator naturally leads to lower fees incurred by each party, as compared to each side hiring a separate valuator, and
- Timeliness – The engagement is likely to be completed faster when using a single valuator since both sides deal with one entity and reduce the need for back-and-forth discussions.
Working With the Valuator
When performing a joint engagement, we recommend that each party and their legal counsel participate in the process by providing information and context throughout the entire engagement, as well as feedback on the draft report.
At Smythe, once we’ve completed our draft report, we provide a thorough presentation of the methodology we used in the valuation and the conclusions we reached (usually through a video conference call). This provides the parties with a greater understanding of the valuation and an opportunity to ask questions.
The goal of running a fair and transparent process is to increase the probability that both parties will accept the independent valuator’s conclusion. This acceptance and buy-in goes a long way in helping to resolve what can be quite a contentious situation.
If one side were to hire its own valuator and produce a report without the other party’s knowledge or involvement, the latter might view the former’s valuator as a “hired gun”, who is biased towards the party that contracted them. If that happens, the tendency is for the second party to then hire their own valuator, which could result in widely different valuations, thus reducing the prospect of reaching an amicable and mutually agreed-upon settlement. This could quickly escalate the dispute and increase the chances of going to court, which in turn would result in higher costs and could extend the timeline for resolution. In addition, if the matter goes to court, none of the previous valuations would be allowed in as evidence and a new third valuator would have to be jointly retained. This would make all the work leading up to that point redundant, not to mention would extend any emotional strife that the parties are facing.
If you would like to discuss Smythe’s qualified experts can help you resolve a matrimonial dispute in a timely and cost-efficient fashion, please contact us today.
1. When choosing a valuator, it is essential to confirm the valuator is independent and has no conflicts of interest.