Understanding and Challenging Family Law Business Valuations:
Learn:
- Fundamentals of Business Valuations
- Finding the most common mistakes made in business valuations
- The secrets to challenging business valuators opinion.
1. Arnold Shields Dolman Bateman & Co Pty Ltd Forensic Accountants www.dolmanbateman.com.au www.dolmanbateman.com.au Challenging business valuations in Family Law
2. Fundamentals www.dolmanbateman.com.au Value of an asset is a function of it's future cashflows What is value? Different concepts of value. Family Law = Value to owner Value = Cashflows x risk Income based valuations assume infinite life of business but discount rate means value after 10 years is negligible.
3. 5 Basic Valuation Methodologies www.dolmanbateman.com.au discounted cash flow, capitalisationof future maintainable profits, notional realisation of assets, value of net tangible assets (on an ongoing concern basis) capitalisationof future maintainable dividends. – Wilde & Wilde [2007] FamCA 1044 (6 September 2007) at 154
4. Discounted Cash Flow (DCF) www.dolmanbateman.com.au Summary The discounted cash flow (DCF) value is the present value of the expected future streams of cash flows discounted at a rate which reflects interest rates and the risk associated with the business.
5. Discounted Cash Flow (DCF) www.dolmanbateman.com.au Pros: Considered as the most accurate method Basis for all other valuation methodologies Cons: Rarely is information required available. High level of assumptions required Misunderstood
6. Future Maintainable Earnings www.dolmanbateman.com.au Summary Value of Business is equal to Future Maintainable Earnings x Capitalisation Factor Value of Business is not Value of Company Will use past earnings as a guide for future profitability.
7. Process of Future Maintainable Earnings www.dolmanbateman.com.au Identification of tangible assets and liabilities Revaluation of assets to market Separation of balance sheet into business assets, surplus assets and financing liabilities. Determination of future maintainable earnings Determination of capitalisation rate Value of business = FME x Cap Rate Goodwill = Value of business less Net Business Assets Value of Company = Net Business Assets + Goodwill + Surplus Assets - Financing Liabilities
9. Future Maintainable Earnings (FME) www.dolmanbateman.com.au Pros Easily understood Commonly Used Fewer assumptions than DCF Cons Difficult to apply to high growth companies and those with abnormal capital expenditure requirements
10. Net Realisable Assets www.dolmanbateman.com.au The value of that shareholding is normally no less than that shareholder’s proportion of the estimated realisable value of the net assets of the company. The notional realisation of assets basis of valuation is normally only applied to businesses which do not produce an annual cash flow, or where, the outlook for a company’s future earnings is either uncertain or the capitalised value of such earnings is less than the net realisable value of the assets employed.
11. Future Maintainable Dividends www.dolmanbateman.com.au Summary The value is equal to present value of the future maintainable dividends discounted at a rate which reflects interest rates and the risk associated with the business. Used in minority interests only.
12. Future Maintainable Dividends www.dolmanbateman.com.au Pros Used in minority interest valuations only, but other methodologies available. Cons Does not take into account retained earnings Dividend rate may be subject to other non-commercial considerations (payroll tax)
13. Definitions of Value www.dolmanbateman.com.au Value to Owner – “The concept of “value to owner” considers and takes into account the benefits to a particular owner even though this may not be based on a hypothetical third party purchaser.” Scott & Scott (2006) FamCA 1379 at 45: Fair Market Value - the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, acting at arm’s length. Special Value – value to a particular purchaser - takes into account synergistic benefits Book Value – value recorded in books
14. Common mistakes www.dolmanbateman.com.au #1 - Maths - the numbers just don't add up #2 - Two sets of books #3 - Rules of Thumb #4 - Methodology incorrectly applied #5 - Concept of Value - Value to owner #6 – Independence #7 - Adjustments to Future Maintainable Earnings
15. Maths Errors www.dolmanbateman.com.au Examples Valuation does not add up Critical Ratios incorrectly calculated (Sales Increase, Gross Profit %, Operating Profit %) Balance Sheets, Profit & Loss incorrectly summarised. Wrong amounts used in FME adjustments. Balance sheets not balancing Assets and Liabilities missed
16. Two Sets of Books www.dolmanbateman.com.au Management Accounts, Financial Statements, Tax Returns are all different One version for Bank and another for Tax Incorrect Accounting Treatment of Transactions Cash not declared Intercompany Accounts not agreeing
17. Rules of Thumb www.dolmanbateman.com.au ROT No evidence to support basis Used by Business Brokers to support price Uneconomic returns Often include owners salary ie. Buying a job
18. Treatment of Surplus Assets andFinancing Liabilities www.dolmanbateman.com.au What are Surplus Assets? Excess cash, property, investments, intercompany loans, directors loans. Financing Liabilities? Bank Loans, Bank Overdrafts, Directors Loans Hire Purchase, Chattel Mortgage, Leases ? Security over personal or other non-business assets
20. Future Maintainable Earnings www.dolmanbateman.com.au Basis of Future Maintainable Earnings Reasons for basis Past earnings are used as a guide to estimating performance. Sufficient Analysis of Business Adjustments Surplus assets Fringe Benefits Non-recurring income and expenditure
21. Commercial Salary www.dolmanbateman.com.au Basis of Commercial Salary Evidence – Salary Survey etc. Are they qualified to give opinion in this area? Base Salary or Total Package including Fringe Benefits such as Motor Vehicles
22. Summary www.dolmanbateman.com.au Does the valuation use an accepted method of valuation? Has the valuation methodology being correctly applied? Does it add up? Have reasons being supplied for opinions? Are reasons for opinions (FME & Cap Rate) supported by evidence?
