Family Law Business Valuation Methodologies

When it comes to Family Law matters involving the division of business assets, selecting the right valuation methodology is critical. In the 2007 decision of Wilde & Wilde [2007] FamCA 1044, five key business valuation methods were outlined as accepted approaches in Family Law disputes. Each serves a specific purpose depending on the business's nature, structure and stage of life.

1. Discounted Cash Flow (DCF)

The Discounted Cash Flow (DCF) method calculates the present value of expected future cash flows. These are discounted using a rate that reflects the risk and time value of money.

While this method is considered the most technically accurate and forms the foundation of all other income-based valuations, it's rarely used in Family Law matters. Why? Because DCF requires detailed and reliable 10-year forecasts of revenue, expenses, balance sheets, and cash flows—data that most private businesses simply do not have. As a result, valuations under DCF require high levels of assumptions, often unsupported by objective evidence.

Best suited for: Large, stable businesses with reliable long-term financial forecasts.

2. Capitalisation of Future Maintainable Earnings (FME)

The Capitalisation of Future Maintainable Earnings (FME) method is the most commonly used in Family Law valuations. It calculates the business value based on a maintainable level of earnings, which is then capitalised using an appropriate rate of return (capitalisation rate).

FME is easier to apply than DCF and is well understood by lawyers and courts. However, it's frequently misapplied, particularly when valuers mistakenly treat the result as the value of goodwill rather than the value of the entire business.

It is less suitable for businesses with high growth trajectories or unusual capital expenditure needs.

Best suited for: Profitable, stable businesses with consistent earnings history.

3. Net Tangible Assets (NTA) on a Going Concern Basis

The Net Tangible Assets (NTA) methodology applies when the business is a going concern but does not generate sufficient profits to justify any goodwill.

This approach values the business based on its net physical assets—subtracting liabilities from total tangible assets. It's generally used for asset-heavy businesses where the income generated does not exceed the return expected on those assets.

Best suited for: Low-profit or break-even businesses where goodwill is not justifiable.

4. Notional Realisation of Assets

The Notional Realisation of Assets method applies where the business is likely to wind down or cease operations. The value depends on how the assets are expected to be realised—through orderly sale, liquidation, or forced sale.

This method is also widely used in valuing investment entities, such as companies that hold shares, property, or other realisable assets.

Best suited for: Businesses being wound up or holding passive investment assets.

5. Capitalisation of Future Maintainable Dividends

The Capitalisation of Future Maintainable Dividends method is rarely used and applies only in narrow circumstances—typically when valuing minority interests in private companies.

It assumes that minority shareholders have no access to retained earnings and that a stable dividend policy has been historically maintained. The value is calculated based on the expected dividend stream.

Best suited for: Valuations of minority interests where dividend income is the only benefit accessible.

Choosing the Right Methodology

Selecting the appropriate valuation method requires a deep understanding of the business, the parties involved, and the legal context. Often, multiple methods are considered before a final value is agreed or ordered by the Court.

At Dolman Bateman, our forensic accountants have extensive experience in business valuation for Family Law matters. We provide independent, evidence-based reports that meet Family Court standards and can stand up to scrutiny.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.