Welcome to the August 2023 edition of MW Insights. I have decided to give Joshua a break and write on something which I have found interestingly exclusive to family law matters when it comes to valuations.
This edition’s topic is: The concept of ‘Value to the Owner’.
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We recently had a meet and greet with a well-established family orientated law firm in the leafy eastern suburbs. The topic of ‘Value to the Owner’ reared its ugly head and, oh boy, it is ugly, given how arbitrarily it is applied in family law matters. It allows for considerations of what a business interest is worth to an owner beyond fair market value; beyond the hypothetical third party purchaser and sometimes beyond reason, depending on who is making the assessment for the parties to consider.
We live and breathe our standards in valuations under APES 225 Valuation Services issued by the Accounting Professional & Ethical Standards Board, and over the years not much has changed. For instance, we are encouraged per paragraph 7.2 to use the terms that are in general use for Valuations Services as defined in the International Glossary of Business Valuation Terms included in the valuation standards of the American Institute of Certified Public Accountants and the Canadian Institute of Chartered Business Valuators. Therefore ‘Value to the Owner’ as listed in the Glossary of Business Valuation Terms states it as being Canadian, ordinarily defined under ‘Investment Value’ as ‘the value to a particular investor based on individual investment requirements and expectations.’
Notwithstanding the above, it seems in terms of family law matters in Australia, the ‘Value to the Owner’ standard has taken on a form of its own prior to the International Glossary of Business Valuation Terms; and borne from that, the unique concept of ‘super profits’ – they almost do not have the same meaning when we view it from the point of case law. The definition from case law can be taken at its most recognisable, in the matter of Scott & Scott [2006] FamCA 1379, and the more recently being Gare & Farlow [2023] FedCFam C2F 109 (which I will not list here as it appears to have been covered extensively by valuers and lawyers alike). Both had interesting views of assessment as to ‘Value to the Owner’ and as we know, valuations are determined on a case-by-case basis due to many different factors to consider.
As a prime example of where a different standard of value was preferred to ‘Value to the Owner’, are Corbon & Klousener (2015) FamCA 842 and Carver & Munshi [2022] FedCFamC2F 607. In summary, the expert in Corbon & Klousener showed good, logical reason as to why ‘Value to the Owner’ was nonsensical, giving reasons in how the business actually conducted itself, and the impacts to the owner, steeped in reality.
The take from this is if we are instructed to consider ‘Value to the Owner’, we must do so within reason and in line with the actual operations and agreements of the entity we are instructed to value. From there, it seems the chips fall where they may should it go to trial – it could be anyone’s guess if the most recent case is anything to go by.
If we are instructed to consider a ‘Value to the Owner’ basis, where it is a private, closely held entity, with a history of being kept in the family, one approach which would take into account the reality that this interest stays in the family, would be to consider an assessment on a fair value basis (rather than a fair market value basis) i.e. to the exclusion of potential minority or marketability discounts, as this may be a truer view of ‘value to the owner’. Again, this would also depend on other factors that are included in the valuation assessment.
We cover the differences in Fair Value and Fair Market Value in our presentation which is geared towards valuations for family law matters – If you would like to know more or are interested in booking our presentation, please let us know.
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,
Joshua, Victoria, and Russell