Property – Determination of valuation methodology – “Value to owner” preferred to “fair market value”
In Gare & Farlow [2023] FedCFamC2F 109 (17 February 2023) Judge Forbes heard competing property and parenting applications following a marriage of almost 10 years that produced two children born in 2010 and 2012.
The asset pool included the wife’s business that was purchased for $50,000 by the wife and her friend Ms O in 1998 through their entity F Pty Ltd ([103]). The business operated out of leased premises. The wife’s father and Ms O’s father-in-law purchased the business premises and rent continued to be paid, albeit there was no written lease. Ms O subsequently sold her share of the business to the wife in 2002 for $75,000 and her father-in-law sold his share of the business premises to the wife’s father in 2013.
In November 2019 the wife’s business was valued by her forensic accountant (“Mr G”) at $57,120 ([54]).
The husband’s expert (“Mr H”) valued the business at $60,228 on a “fair market value” basis due to the absence of a lease and said that if there was a lease, the value would be $361,723 ([55]). In May 2020, Mr H then valued the business at $400,000 on a “value to owner” basis ([60]).
Prior to the trial in February 2022, Mr H provided an updated valuation using a “fair market” valuation methodology absent a commercial lease of $224,820. At trial, the wife relied on Mr G’s updated valuation of $56,948 ([102]).
Judge Forbes said (from [107]):
“The wife’s case is that the business provides her with a source of income but that if she were to sell it she would not recover anything other than the cash value of the business assets. When cross-examined the wife agreed that she could realise a greater return for the business if her father entered a written commercial lease with her or a prospective purchaser, but she said that she had no intention of selling and that her father would not offer a written lease in any event.
[108] The husband … contends that the business has a much greater intrinsic value, whether valued by its net asset backing or on a ‘value to owner’ basis which would assume the existence of an industry standard commercial lease between the business and the landlord. The substance of the husband’s case is that the absence of a written lease between the wife and her father is a calculated and deliberate ploy to minimise the true underlying value of the business by presenting it as an unsaleable asset.
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[119] … [I]f confronted with the reality that his daughter’s business might realise well over $400,000 … if sold with a lease, I have considerable doubt … that [her father] would deny his daughter the opportunity to realise the fruits of her 25 year investment. … ”
After summarising the evidence of the competing experts, Judge Forbes continued (from [177]):
“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.
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[180] 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 [Scott & Scott (2006) FamCA 1379]. Such benefits might include the right to receive profits or dividends, the flexibility and autonomy of self-employment, control and ownership of business assets, the use of a company car, use of the company for contribution to household expenses and bills, the use of a loan account, the ability to tax plan and so on [See e.g. Harrison & Harrison (1996) FLC 92-682 (‘Harrison’)]. There may be other benefits such as security of tenancy due to a special relationship with a landlord or the ability to expend funds in a way which benefits other family members. 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.
[181] In a fair market value valuation, risk is considered from the hypothetical willing but not anxious buyer. It reflects the value of each asset and liability on a going concern basis and the profitability, market position and attractiveness of the business. The value to owner approach on the other hand considers risk from the perspective of the existing owner and assumes that the party wishing to hold on to the asset will do so in good faith and seek to maximise the value that could be obtained in a hypothetical sale. …
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[184] It was submitted on behalf of the wife that the value to owner approach to valuation is normally used to value a minority shareholding, usually in a family business, which is not realisable because there is no available market. It is true that the approach is often used in such cases, although it has also been adopted in respect of partnership interests in medical practices, legal practices and similar businesses.
[185] The criterion which engages the value to owner approach is not whether a party is a minority shareholder. Rather the critical criteria are the absence of a market for the party’s interest in a business … and evidence of circumstances which satisfy the Court that even in the absence of a market the party is likely to retain the interest because he or she derives real value and benefits from it, of the type described in Harrison [See also Wender & Wender [2017] FamCAFC 48].
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[188] … I am satisfied that in the circumstances of this case the ‘value to owner’ approach to valuation is appropriate for the following reasons:
(1) there is no market for the wife’s interest in the business. In the absence of a written commercial lease, the business is not saleable as a going concern to a third-party purchaser and cannot be valued on that basis;
(2) the evidence demonstrates that the business is successful and profitable and has been so for the entire time it has been owned by the wife. The business has in the past and continues 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 is the security of its tenancy on favourable terms notwithstanding the absence of a written lease. … ;
(4) I infer that the business has significant value to the owner having regard to what the wife was prepared to pay to buy out her partner Ms O in 2002. … ;
(5) the evidence clearly establishes that the wife wishes to retain the business, intends to operate it on an indefinite basis and that she has no intention to sell the business, let alone close it. … ;
(6) a further significant benefit to the wife is 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 is evidence that … if a standard industry lease were in place, the wife could expect to realise in excess of $400,000.
[189] Despite the wife’s attack on his credentials and Mr G’s strident criticism of his methodology, I accept the evidence of Mr H that for the purpose of determining the asset pool the business should be valued at $429,500 on a value to owner basis. … ”