In family law matters involving the division of real estate, businesses, vehicles, luxury goods, and other assets, how does one determine the value?
Section 87 of the Family Law Act ("FLA") provides that:
Valuing family property and family debt
87 Unless an agreement or order provides otherwise and except in relation to a division of family property under Part 6,
- (a) the value of family property must be based on its fair market value, and
- (b) the value of family property and family debt must be determined as of the date
(i) an agreement dividing the family property and family debt is
made, or
(ii) of the hearing before the court respecting the division of
property and family debt.
Typically, the value of family property is its current fair market value, "current" meaning as close to the trial date or the date of the parties' separation agreement as possible. The parties can mutually agree on the current fair market value of any asset that is being divided, but where the parties cannot agree, the parties would typically retain an expert to provide an appraisal of the estimated current fair market value of assets such as real estate, watches, art, jewelry, and other valuable goods.
However, because expert reports must be delivered at least 84 days in advance of the scheduled trial date pursuant to Rule 13-6 of the Supreme Court Family Rules ("SCFR"), the typical "current" fair market value of an asset is already at least a few months out of date by the time the parties reach trial. When it comes to the value of a business, the value can be several months or even half a year out of date, as a chartered business valuator ("CBV") relies on the business' annual year-end financial statements in order to determine the business' value.
Business Valuations
The valuation of a business is also fairly complicated and can take several weeks or even months to complete, depending on the complexity of the business. A small clothing retail business or a local restaurant would be a simpler valuation than a private equity firm or a mining company with speculative mineral rights. Nonetheless, the valuation of a business, regardless of industry type or size of the company, all follow the same basic principles.
Foremost, the CBV must obtain a good understanding of the business being valued, including the industry it is in, its major competitors, its main customers or market, its suppliers, the size of its operations and where it is geographically located, and the company's historical performance.
Based on that understanding, the CBV can then determine the best valuation approach for the business. There are three broad categories of valuation approaches:
- Income-based, which examines the earnings of the company and determines the value of the business based on the anticipated future returns of the business. This involves ascertaining the EBITDA (earnings before interest, taxes, depreciation, and amortization) and choosing a multiplier that is most appropriate for the industry, the level of risk in future revenue generation, and numerous other factors. This method is most commonly used for businesses which are operational and are expected to continue to generate revenue.
- Market-based, which compares the business to other similar publicly listed companies and looks at past sales of similar businesses. This method is less frequently used in business valuations, as it may be difficult to find sufficient comparable companies if there is a lack of historical sales data, and the majority of public companies are far larger than the business being valued and may not be comparable. The market-based approach is the most common approach in valuing real estate, as comparable recent sales of real estate in the nearby area are a good indicator of fair market value.
- Asset-based, which calculates the tangible and intangible assets of the business. Tangible assets include land, equipment, and inventory. Intangible assets include intellectual property and goodwill. This method is most frequently used for holding companies which do not have an operational income-earning business, businesses that are heavily invested in tangible assets such as real estate, or businesses that are undergoing liquidation or have no ongoing profitability.
The data that the CBV relies upon in coming to a valuation conclusion will come from several sources, much of which is within the possession of the business-owning party, including the business' financial statements, legal agreements such as leases, supplier contracts, and other information involving the operations and finances of the business. The CBV may also review industry research and third-party reports such as real estate or equipment appraisal. The valuation report includes a "scope of review" section which sets out all the information relied upon. This section should be thoroughly reviewed by the parties and their legal counsel to determine whether the information provided was reliable and complete. Missing information or information that was provided by the business-owning party without adequate verification may undermine the accuracy of the valuation conclusion. For example, if a business owner neglects to inform the CBV that the business has an extra source of cash revenue that is not reported in its books, the valuation conclusion would be inaccurate.
Finally, the CBV also relies on certain assumptions to come to a valuation conclusion. Assumptions about the future performance of the business, the business' risk profile, the market conditions of the industry in which the business operates, and legal assumptions such as the transferability of the business owner's shares all impact the valuation conclusion. It is important to determine if the assumptions are accurate or supported by the evidence in assessing the accuracy of the valuation conclusion. For example, an assumption that the market conditions would remain steady in the valuation of a car dealership would be incorrect in the current political landscape, as it fails to take into consideration the impact of recent US tariffs on the auto industry and the resulting volatility in the market.
The valuation of a business or any other asset is part science and part art. Two qualified and experienced experts may have different opinions on a company's value, and both have reasonable rationales for their differing opinions. Parties who are undergoing a separation in which business interests or other assets are being divided will wish to discuss with their lawyer the best method of determining values and assessing and challenging expert valuations.
About Mackrell International – Canada - Lindsay Kenney LLP is a full service business law firm with offices in Vancouver and Langley, BC and a member of Mackrell International. Mackrell International – Canada is comprised of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well-connected in our communities, an advantage shared with our clients. With close relations amongst our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions within Canada.
This article is intended to be an overview and is for informational purposes only.
