MW Insights – January 2023
Happy New Year, and welcome to our first edition of MW Insights for 2023.
Our office re-opened on 9 January, and we are excited to officially welcome Pauline to our team. We have noticed many of our colleagues are still on leave and hope everyone is enjoying a well deserved break.
MW Insights
In this edition we would like to address a key item we have noticed that has been excluded from various valuation reports we have been engaged to critique: Equity, or interest to the parties.
You may be under the impression that a business valuation only considers the value of ‘the business’, however this is not always the case (especially for family law!). A business is comprised of its operations as well as its assets and liabilities. Some key items and terms are as follows:
- Net operating assets – These are the items on the balance sheet that relate to the ordinary operations of the business and the income it derives e.g. debtors, revenue generating plant and equipment, creditors, and tax.
- Non-operating assets/liabilities – These are surplus to the business and can include loans (both with owners/associates and third-party lenders), property/investments, and surplus cash.
- Business/Enterprise value – This is the value of the business and is generally derived by multiplying (or capitalising) an assessed future maintainable earnings of the business. The business value can be broken down into two components: net operating assets, and goodwill. Goodwill is basically the difference between the business value and the net operating assets.
- Equity value – This is the value of the entity’s equity (if the business is in a company structure, then this would be the shares) and is calculated by adding the net non-operating assets to the business value. Where there are negative net non-operating assets (a deficiency, or net non-operating liabilities), then this amount is deducted from the business value.
Without the equity value, you can not assess what the value to parties truly is. In a recent report we were engaged to critique, the opposing valuer used a different methodology to derive a business value that was greater than the amount assessed by us, however their report ignored the equity value completely – This was a major issue as the business was severely deficient in net assets, and the deficiency was significantly larger than the business value assessed i.e. it eroded any assessed business value and overall, resulted in a negative equity value (or no value to the parties). As you can imagine, situations like this are likely to cause issues with negotiations as one party has been incorrectly informed and believes the business is far more valuable than it is. Both parties incurred costs that were unnecessary solely because the expert report did not consider equity, and the report would not stand up to the scrutiny of the Court.
We recommend prior to engaging any independent expert for family law purposes, that you verify their report will include and consider the equity value.
As always, you can reach out at any time (03) 9816 9122 or email us at advice@mwforensic.com.au if you require our assistance or want to talk Business Valuations and Forensic Accounting.
Regards,
Victoria, Russell, and Joshua.