January 2, 2016
Divorce filings in the early months of every year are typically one-third higher compared to other months. While some people are losing weight and resolving to save money, others have a more ominous task ahead of them – separating marital assets.
A business asset may be the most difficult asset to split or value while going through a divorce. Depending on whether you are the one keeping the enterprise or receiving a settlement on its value, your expectation of value may be surprising.
Most commonly, the standard of value for assessing a business in family court is “Fair Market Value.” Fair Market Value is defined in Canada as “the highest price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell; both parties having reasonable knowledge of relevant facts”. There are a few bombshells lurking in here for those valuing their businesses. I will highlight two of them.
One: Fair Market Value is not typically the standard of value when you assess your business for the purposes of a sale. This is sometimes referred to as enterprise value. Enterprise value is closer to the price when you know who the buyer is, or is likely to be. For example, if you are going to sell your store you may approach your competition or a corporate buyer. You know that they might be willing to pay a bit more for your store because of competitive advantages. This may result in a higher value than a Fair Market Value standard would allow given the family law standard contemplates a hypothetical buyer – not a specific one.
Two: In a Fair Market Value standard, a minority interest in the business may be a reason to discount the value of that minority interest. In this standard a 20% share, for example, may not be valued pro-rata. That is, 20% of the shares do not receive 20% of the price in a hypothetical sale of the company – as these shares do not control the company.
Completely unrelated and quite surprising to some are the looming contents of your shareholder’s agreement – especially with multiple owners. Sometimes it has been written (and forgotten) that shares subject to a matrimonial order trigger a default event and can be re-purchased by the company – sometimes at a discounted rate. Another shock could be the value premise outlined in the shareholder’s agreement. The company for the purposes of default valuation, may have chosen the book value premise rather than a going concern. This may result in a value that does not consider any goodwill of the business.
Don’t be surprised that future growth will not be considered by a family courts. The true value of any business should consider growth of the business if it is likely to occur. Not so true when considering the value of the Business for valuing marital assets for a divorce. In this situation, in is likely that historical earnings are considered.
Depending on what side of the equation you are on, the value of the Business asset may be surprisingly pleasing or as unattractive as your pending legal bill. To avoid these surprises, it is sage advice to seek a professional assessment of your asset from the perspective of the courts and review your shareholder’s agreements.