Value to Owner Methodology

This case provides a practical example of the methodology known as ‘value to owner’ when determining a business valuation for family law purposes. It encompasses a summary of the jurisprudence relating to the value to owner methodology.

The facts

The facts of this case will be confined to those relevant to the value to owner ‘issue’. To that end:

1. The wife was 45 years old and owned and operated F Pty Ltd defined as ‘the Business’. She was employed in the Business as a worker and manager, asserting an income of ~$62,000 per annum (although her earnings varied over time and her potential income potential remained an issue in dispute).
2. The husband was 44 years old. He was employed as a tradesman and earned ~$107,711 per annum.
3. In 2006, the parties met through mutual friends and commenced a relationship. They commenced cohabitation in 2009 and were married in 2009. The parties separated on 14 February 2019 and lived separately and apart under one roof until January 2020.
4. In 1998, some ten years before cohabitation, the wife purchased the Business with a friend and business partner, Ms O, in equal shares. Each of them contributed $25,000 towards the $50,000 purchase. The pair incorporated F Pty Ltd to run the Business. At the time of purchase, the business premises were subject to a third party lease for which the rental was $3,330 per month.
5. In 1999, the freehold for the business premises came up for sale and the wife’s father, Mr K, and Ms O’s father-in-law, Mr P, purchased premises. No written lease was entered into between the business and the landlords and the wife and Ms O were permitted to carry on the business in the absence of a written lease. Notwithstanding, the wife and Ms O continued to pay commercial rent to Mr K and Mr P at the rate that was being paid to the previous landlord, namely $3,330 per month. The wife and Ms O were also required to maintain the property and pay all outgoings.
6. In 2002, the wife purchased Ms O’s interest in the Business for $75,000 and thereafter became the sole director and shareholder of F Pty Ltd. It was not disputed that between 1998 and 2002, the wife paid a total of $100,000 for the Business. Following the wife’s purchase of the Business it continued to operate out of premises owned by her father.
7. The wife contended that during her adult life, commencing in her late teens or early twenties, she had been the recipient of various loans from her father. The “loans”, ranging in amounts from ~ $400 to $25,000 and totalling $114,885, were purportedly advanced by the father over a 20-year period for a multitude of reasons, including to assist with the purchase of assets, including a car and the wife’s first home, and to pay off tax debts, cover personal expenses and to purchase a car for the husband. According to the wife, each of these sums received from Mr K was advanced on the basis that it would be repaid. A repayment of the “loans” by the wife to her father, shortly prior to separation, is the subject of dispute in these proceedings.
8. In about 2014, the wife’s father Mr K purchased Mr P’s interest in the business premises. Mr K never offered the wife a formal written lease and asserted that he had no intention of doing so. Nonetheless, despite there being no written lease in place, the wife continues to occupy the premises and pay rent at the rate of $3,330 per month and outgoings. She also gave evidence that she is required to keep the premises in good repair by re-doing the floors, painting, and landscaping approximately every three years.
9. The husband contended that there was no written lease in place between the Business and the owner of the premises because of the father-daughter relationship and argued that they have refrained from entering any formal arrangement to minimise the value of the Business as an asset in the proceeding. This issue was relevant to the value to be attributed to the Business.
10. In August 2018, the wife asserted that her father “made a demand for repayment of a substantial portion of the loan” owed to him. The wife transferred to Mr K a sum of $106,681 that she held in savings. The husband claimed no knowledge of these savings or this transaction and contends that he did not become aware of it until it was unearthed during the proceeding.
11. On 6 November 2019, a forensic accountant instructed by the wife, valued the Business at $57,129, based on a valuation method developed by him over two decades. That valuation was based on an assessment of the earnings before interest and taxation (i.e., EBIT) that could reasonably be expected to flow to a hypothetical purchaser as profit.
12. A few days later, a further expert instructed by the husband, valued the Business as a going concern at $60,288 on a “fair market value” basis. That valuation considered information from Mr K that there was no lease in place, and that he would not offer a lease to any potential purchaser of the Business because he wanted to convert the property into another business. The expert otherwise opined that he would have adopted a value of $361,723 for the Business if it had an industry standard lease in place.
13. On 25 May 2020, the expert instructed by the husband, prepared an amended valuation of the Business, on this occasion assessing it to be valued as a going concern at $400,000 on a “value to owner” basis.
14. On 17 January 2022, the wife’s expert filed an affidavit in the proceeding on behalf of the wife which annexed an updated expert valuation valuing the Business at $56,948.
15. On 1 February 2022, the husband filed a further report from his expert in which he expresses the opinion, based on more recent financial accounts, that the wife’s business was valued at $429,500 on a “value to owner” basis.

Judicial discussion of value to owner

As identified above, the valuation of the Business was a hotly contested issue in the proceeding. There was considerable difference between each of the party’s expert opinions.

Consideration of the issues relating to the valuation of the Business begins at paragraph [102] of the judgment. The Court had regard to the law evidence of the parties, the expert valuation evidence of the competing experts, objections to expert qualifications, and submissions of the parties.

The Trial Judge then went on to consider relevant law with respect to the issue. Specifically, the Court:

1. Restated the established principles that the:
   • Determination of valuation issues is essentially a matter for the trial Judge and may be assisted by evidence of expert witnesses. The purpose of such evidence is to enable the trial Judge to form his or her own independent judgment on the matter by the application of the appropriate principles.
   • Trial Judge must satisfy himself or herself, by means of the application of proper principles, that he or she has arrived at an appropriate value. If that value happens to be different to the values ascribed to the relevant property by the valuers called in evidence, this in itself does not affect the validity of the Judge’s finding provided that proper principles have been applied.
2. Reiterated applicable principles in relation to the valuation of corporate / business interests. Specifically:
   • (a) The determination of the value of property involves a determination of the most appropriate method of valuation, which determination in turn depends on a number of factors. In the case of shares, those factors include the purpose for which the valuation is made, the nature of the shareholding, the character of the company’s business, its capacity to earn profits and the net value of its assets.
   • (b) It is the shareholding of the party, as opposed to the assets of the company, which must be valued.
   • (c) Whilst the primary test is that of a hypothetical prudent purchaser, it is the case that for the purposes of Family Law, the present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse, who either has control after divorce, or who stands ultimately to benefit from them, or control them after the death of generous parents.
   • (d) In proceedings under the Family Law Act 1975 (Cth), the value to be ascribed to shares in a family Company must be a realistic one, based upon the worth of the shares to the party himself or herself.
   • (e) It is open to the trial judge as a matter of discretion to determine which valuation method is most appropriate, although the Court will of course be guided by (but it is not bound to uncritically accept) expert evidence on the issue.
   • (f) It is well accepted that traditional valuation methods which have been developed for commercial purposes may be inappropriate for the purposes of a Family Law valuation.
3. Observed, with respect to the value to owner methodology, that:
   • The value to owner approach to valuation is intended to capture the reality of the situation by bringing to account any special or additional economic benefit which is conferred upon the business owner by his or her control of the shareholding. It is intended to include within the value any commercial, financial or other advantage which accrues to the owner which might not necessarily be available to any hypothetical third party purchaser. Moreover, a valuation which assumes a negligible or only net asset value because the business is “unsaleable” is artificial because it ignores the reality of benefits which accrue to the owner.
   • An instructive working definition of value to owner was posited at what a reasonable, prudent businessperson, in the position of the holder [husband or wife], is willing but not anxious to exchange the asset for cash, and reasonably informed of the relevant facts, would see as the cash equivalent of the relevant asset to him / her.
   • The foregoing definition begs the relevant question that, if a business is said to be worth nothing or only its net asset value, why would a proprietor want to hold it and have no intention of selling it? What realistically would the proprietor have to be paid to relinquish the business and the benefits derived from it?

What was the outcome?

In determining the proper value of the Business then, the Court had regard to, and concluded that, among other things the ‘value to owner’ approach was appropriate. It so concluded because, among other things:

1. There was no market for the wife’s interest in the Business. In the absence of a written commercial lease, the Business was not saleable as a going concern to a third-party purchaser and cannot be valued on that basis.
2. The evidence demonstrated that the Business is successful and profitable and had been so for the entire time it has been owned by the wife. The Business had in the past and continued to deliver significant financial and other benefits to the wife in terms of steady and reliable profits, a salary, flexibility of self-employment and autonomy, access to and control of business funds, the ability to tax-plan among other things.
3. A unique benefit to the owner of the ongoing business was the security of its tenancy on favourable terms notwithstanding the absence of a written lease. While the wife’s father said that he could re-purpose the premises and derive a greater commercial return from it, he had not done so. Moreover, the wife had been prepared to invest considerable funds from the Business into renovations and improvements to her father’s property, suggesting that she had no concerns about the security of her tenancy.
4. It was inferred that the Business had significant value to the owner having regard to what the wife was prepared to pay to buy out her partner Ms O in 2002. That was a payment made in circumstances where the Business had no written lease. The Court could infer that the enterprise value of the Business to the wife at that time was considered to be in the order of $150,000.
5. The evidence clearly established that the wife wished to retain the Business, intended to operate it on an indefinite basis and that she had no intention to sell the Business, let alone close it. The evidence of the wife’s father corroborated that his daughter had no intention of selling the Business and that he would only re-purpose the building if she were to close it.
6. A further significant benefit to the wife was the very real likelihood that her landlord father would act in his daughter’s best interests should she ever decide to sell the Business. There was evidence that there is a market for businesses and if a standard industry lease were in place, the wife could expect to realise in excess of $400,000.

Accordingly, despite the wife’s attack on his credentials and her expert’s strident criticism of his methodology, the Court accepted the evidence of the husband’s expert and determined that the Business should be valued at $429,500 on a value to owner basis.

Issues to note

The decision identifies the importance of considering the most appropriate methodology when determining the value of a party’s interest in an entity or business for family law purposes. It is illustrative of the Court’s consideration to such valuations and demonstrates the importance of adducing evidence (or not) in support of a particular valuation methodology.

Gare & Farlow [2023] FedCFamC2F 109