Published On: Thursday, 02 May 2019
Business Valuation Critical in Divorce
DIVORCE - Marital breakdowns can be stressful and difficult.
Not only do spouses need to figure out the structure of their family post-separation, they also need to know what assets they possess and ultimately, figure out the value of these assets and how these assets will be split once the divorce is finalized.
As Chartered Business Valuators (CBVs), we are often engaged by lawyers and clients for the purpose of determining a spouse’s interest in a company.
A common scenario we observe is where one spouse holds the controlling shares of the company and runs the day-to-day operations, while the other spouse holds the non-controlling, preferred shares for purposes of income splitting.
In this example, the non-controlling shares would be entitled to dividends. In this case, our role would be to determine what the fair market value of all the shares in the company are.
Typically, these are referred to as “en bloc fair market value”. We would then allocate the en bloc value to each class of shares held by the respective parties.
In addition to the above, sometimes we would be asked to determine the amount of income available to one, or both spouses, from their employment and ownership of their company. This is commonly referred to as “Guideline Income” pursuant to the Federal Child Support Guidelines and the Spousal Support Advisory Guidelines.
The purpose of preparing the Guideline Income Report is to assist the spouses, their legal counsel and the courts in assessing the amount of income available for child and/or spousal support. For child support, this is essentially the level of support, as established by the federal and provincial support guidelines, necessary in raising the child based on the payer’s earnings and the number of children.
Spousal support, on the other hand, reflects the amount necessary for the receiving spouse to continue to live for a period of time in which they were accustomed to before generating sufficient income on their own; the measurement of which is often less objectively determined and under the discretion of the courts or mediator/arbitrator/spousal agreement depending on the route the spouses choose to undergo.
In the case of a divorce through court, our role as CBVs is to act as expert witnesses following the Canadian judicial system standards and provide the courts with an opinion that the court would not otherwise have been able to reach.
Paramount to this, is the need for us to be impartial and objective in our engagement and maintain our independence throughout the process in accordance with the Supreme Court Family Rule 13-2: “Duty of Expert Witnesses”.
As expert witnesses, we provide technical guidance, outside experience and knowledge relating to the company being valued. The expert witness can also be referred to as an opinion witness.
Different from a fact witness whereby the witness must have direct involvement in the matter and provide evidence in the legal proceeding based on what they observed (i.e. fact witnesses are not allowed to testify their opinion about another’s action or what is deemed to be hearsay), an expert (or opinion) witness does not have direct involvement in the matter until after the incident (i.e. marital breakdown).
As a result, the expert witness can use external evidence, such as statistics, to provide evidence to support their opinion.
Given that a CBV’s level of work does not change if one party engages the valuator, or both parties engage the same valuator, we are often jointly retained as the expert. Advantages to a joint valuation engagement include:
- Cost savings – less fees are spent on experts if both parties retain one rather than each party hiring an expert;
- Fairness – there is a stronger perception of independence and impartiality if both parties engage the same expert since both parties share the cost; and
- Timeliness – the engagement is typically completed more quickly since both sides are usually cooperating in order to have the valuation and guideline income calculations completed.
Another advantage in a joint engagement is that the CBV would correspond with both parties, including their legal counsel, in all forms of communication. Any phone calls also involve both parties and their legal counsel, so everyone is aware of all responses made to the expert.
Likewise, the expert cannot accept instructions or alterations coming from only one party – both parties would fundamentally agree on any assumptions used in the valuation.
In addition to the above, there are cases whereby we are asked to provide forensic services to the parties. The forensic services are offered when one party feels that there are hidden assets or unrecorded income and personal expenses that were recorded in the company that will impact the valuation process or reduce the income otherwise available for child and/or spousal support purposes.
While there is value in this type of engagement, we typically warn our clients and legal counsel that there is no guarantee the forensic analysis performed will result in sufficient findings or evidence that will impact our overall valuation conclusions.
Depending on the availability of documentation and financial records, a forensic analysis can also be very costly as a substantial amount of time may be needed to verify the nature of the financial information provided.
In the event the spouses do not desire to undergo the traditional divorce route (i.e. court), the collaborative divorce process may be an effective alternative solution. In a court-based divorce, the lawyer would negotiate and fight for what is best for their client.
This may lead to an adversarial outcome and potentially lead to a win-lose situation between the parties. Collaborative divorce, on the other hand, involves family lawyers (one for each spouse), a family coach and financial specialists to assist both parties to resolve their conflicts and work towards a common goal.
While the differences in roles are more pronounced in the legal counsel’s roles, CBVs undergo a very similar process in their valuation, guideline income and/or forensic engagement (i.e. the valuator would continue to maintain their independence in their engagement, be impartial and make fully aware the assumptions and sources of information used in their overall valuation conclusions).
Although spouses have many different options on how they want their separation/divorce to be finalized, the role of a CBV is to assist the spouses to arrive at a valuation conclusion on the fair market value of their assets.
In addition, a CBV can assist the parties in calculating the income available for child and spousal support purposes and, if the need arises, provide value in assessing unrecorded assets, income or personal expenses in the company via forensic analyses.
If you have any questions regarding the types of services Smythe Advisory can provide to you in the event of a marital breakdown, please contact one of our trusted Chartered Business Valuators.