Family Law Valuations

Transcription

1 Family Law Valuations in the current family and economic environment John Thynne Director, Forensic Services Peter Haley Director, Forensic Services The Presenters John Thynne FCA Peter Haley FCA Director Forensic Director Forensic Accredited Business Valuation Specialist CAANZ Accredited Business Valuation Specialist CAANZ Direct line: Direct line:

2 Important Disclaimer The information contained in this presentation is intended for general use and guidance only. None of the information presented should be considered as formal advice and any imputation in that regard is specifically rejected. 3 Overview 01 Instructions Will the expert s scope assist in settling the matter? 02 Is the Business property or a financial resource? 03 Can a business have a negative value? 04 Is the business infrastructure a valuable asset or a sunk cost? 05 Should income tax be taken into account on Div 7A loans? 06 Next session 2

3 Instructions Will the expert s scope assist in settling the matter? Standard Instructions We confirm that you have been appointed as single expert in this matter. You are instructed to value the parties interests in the following entities: 1. Hire Business Pty Ltd 2. Holding Company Pty Ltd; and 3. Family Trust 6 3

4 Group Structure Hire Business Pty Ltd 100% Holding Company Pty Ltd 100% 7 Family Trust Summary of values I have in this Report and as set out on Schedule 1 hereto arrived at the assessments of value as follows: Hire Business Pty Ltd 2,781, Sch 3 Holding Company Pty Ltd 5,473, Sch 5 Family Trust 5,740, Sch 6 8 Holding Company Pty Ltd holds the shares in Hire Business Pty Ltd and therefore reflects the value of that entity. Family Trust holds the shares in Holding Company Pty Ltd and therefore reflects the value of that entity. 4

5 Matrimonial Net Assets Wife s Proposal Adopted Value $ Husband $ Wife $ Matrimonial Home 1,500,000 1,500,000 Family Trust 5,740,249 5,740,249 0 Sub-Total 7,240,249 5,740,249 1,500,000 Balancing Payment 0 (3,206,162) 3,206,162 Total 7,240,249 2,534,087 4,706, % 65.0% 9 Proposed Hire Business Pty Ltd borrows or sells equipment to fund payment Entity valuation per report ENTITY VALUATION As At Report 30-Jun Adopted 2017 Value $ $ Assets Cash and Cash Equivalents Cash on Hand St George Online Saver 186, ,195 Payroll Account 8,621 8,621 Trade Debtors 5,619,325 5,619,325 Less: Provision for Doubtful Debts (112,387) Plant & Equipment 7,993,136 less : Accumulated Depreciation (3,026,646) General Pool 825,708 7,580,600 less : Accumulated Depreciation (707,748) Less: Estimated Realisation Costs Less: Estimated Income Tax - Loans - Related Entities 500, ,089 Intangible Assets Prepaid Borrowing Expenses 7,058 - Goodwill on Consideration - - TOTAL ASSETS 11,405,858 13,782,564 ENTITY VALUATION As At Report 30-Jun Adopted 2017 Value $ $ Liabilities Trade & Other Payables 4,842,916 4,901,406 Borrowings Holding Company Pty Ltd - St George 45,823 45,823 Credit Cards 32,299 32,299 Liquidation Costs Termination of Leased Premises Termination of Long Term Rentals Entity Wind Up Costs Liquidator Costs Loans (Payable) Holding Company Pty Ltd 2,727,558 2,727,558 Related Entity Pty Ltd 300, ,671 Related Trust Trust 71,206 71,206 Related Partnership 12,438 12,438 Borrowings Hire Purchase Liability 1,593,673 1,593,673 Hire Purchase Liability 1,315,620 1,315,620 Early Termination - Unexpired Interest at TOTAL LIABILITIES 10,942,203 11,000, ,654 2,781, Proposed Hire Business Pty Ltd borrows or sells equipment to fund payment 5

6 Summary of values If sell equipment, need to meet: Realisation costs Repay debt on equipment Tax on recouped depreciation Top Up tax on dividend payment $1.0m payment would result in $1.8m of asset sales. This would materially change the capacity of the business. $3.2m payment would result in $6.5m of asset sales. This would result in a likely termination of the business. 11 Revised entity valuation ENTITY VALUATION As At Report Revised Liquidation 30-Jun Adopted Report Adopted 2017 Value Value Value $ $ $ $ Assets Cash and Cash Equivalents Cash on Hand St George Online Saver 186, , , ,195 Payroll Account 8,621 8,621 8,621 8,621 Trade Debtors 5,619,325 5,619,325 5,619,325 5,619,325 Less: Provision for Doubtful Debts (112,387) (112,387) (112,387) Less: Breach of Contract - Damages Plant & Equipment 7,993,136 less : Accumulated Depreciation (3,026,646) 7,580,600 7,580,600 4,270,900 General Pool 825,708 less : Accumulated Depreciation (707,748) Less: Estimated Realisation Costs (568,545) (320,318) Less: Estimated Income Tax - (578,282) - Loans - Related Entities 500, , , ,089 Intangible Assets Prepaid Borrowing Expenses 7, Goodwill on Consideration TOTAL ASSETS 11,405,858 13,782,564 12,635,737 10,152,546 6

7 Revised entity valuation ENTITY VALUATION As At Report Revised Liquidation 30-Jun Adopted Report Adopted 2017 Value Value Value $ $ $ $ Liabilities Trade & Other Payables 4,842,916 4,901,406 4,901,406 4,901,406 Borrowings Holding Company Pty Ltd - St George 45,823 45,823 45,823 45,823 Credit Cards 32,299 32,299 32,299 32,299 Liquidation Costs Termination of Leased Premises - - Termination of Long Term Rentals 4,668,017 Entity Wind Up Costs 350,000 Liquidator Costs 10,000 Loans (Payable) Holding Company Pty Ltd 2,727,558 2,727,558 2,727,558 - Related Entity Pty Ltd 300, , ,671 - Related Trust Trust 71,206 71,206 71,206 - Related Partnership 12,438 12,438 12,438 - Borrowings Hire Purchase Liability 1,593,673 1,593,673 1,593,673 1,593,673 Hire Purchase Liability 1,315,620 1,315,620 1,315,620 1,315,620 Early Termination - Unexpired Interest at ,983 TOTAL LIABILITIES 10,942,203 11,000,693 11,000,693 12,969, ,654 2,781,871 1,635,044 (2,817,274) TAX ON RETAINED EARNINGS (FAMILY TRUST) 13 Dividend 5,509,429 4,362,602 - Imputation Credit 2,361,184 1,869,687-7,870,613 6,232, ,699,188 2,929,176 - Franking Credit (2,361,184) (1,869,687) - "Top Up" Tax 1,338,004 1,059,489 - Closing Matter has now gone to arbitration. Orders for the Company to make payments to the Wife (net of tax) over the next 5 years from profits. Husband has determined the new sales break-even point, taking into account these payments, his salary and capital commitments, will be unlikely to be consistently attained. Husband is currently considering his options. If the single expert had received a wider scope to cover some of the issues, could have the result been different? 14 7

8 Is the business property or a financial resource? Property v financial resource First step of the four step process What is the pool of assets, liabilities and financial resources and what are the legal and equitable interests of each of the parties? 16 8

9 Property v financial resource Property Financial Resource Section 4 of the Family Law Act defines property as follows: Property, in relation to the parties to a marriage or either of them, means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion. The term financial resource is not defined in the Act. A financial resource can be thought of as something which is not property included in the asset pool but is a factor for the Court to take into account under section 75(2)(o) of the Act because it has a future financial benefit to one party. 17 Property v financial resource Property normally valued at market value Spencer s Case definition The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein each party had acted knowledgeably, prudently and without compulsion. Spencer v The Commonwealth (1907) 5 C.L.R. 418, at p 432. International Valuation Standards Council definition The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. 18 Key factor of the traditional valuation definition exchange 9

10 Property v financial resource Value to owner (VTO) and family law Are all valuations VTO? Griffith CJ: In my judgement the test of value of land is to be determined not by enquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by enquiring What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not anxious to sell. Spencer v The Commonwealth (1907) 5 C.L.R. 418, at p 432. This definition of value could also be called its deprival value. 19 Property v financial resource Value = the worth of an investment / the price it will achieve As such, market value can only be achieved if the property is able to be exchanged, even if exchanged hypothetically. But does Market Value = Market Price? Price is what you pay value is what you get (Warren Buffett) It is not uncommon for VTO to be more than market value / market price, e.g. where the business is unsaleable due to personal goodwill issues / unique abilities of the business owning spouse 20 Ordinarily, adopt Market Value. Where there is no market, VTO may be appropriate 10

11 Property v financial resource Warnick J. in Ramsay v Ramsay (1997) FCL It is unhelpful for valuations to focus on the lack of a market in establishing a value to the shareholder any allowance for lack of realisable value is best made by the Court in all the circumstances of the case, particularly the presence or absence of other assets which are disposable. This statement ignores the fact that marketability is one of the key risks attaching to a business and is incorporated in the capitalisation rate. 21 Property v financial resource Is the Business property or a financial resource? All Businesses fall on a scale, depending on the specific circumstances Property Financial Resource 22 11

12 Property v financial resource How do you treat a business that can t be sold? Case Study 23 Husband built up donga manufacturing business Sold the business some years ago to multinational Husband employed as general manager Husband also given contract to install plumbing in dongas by multinational Labour only and no contractual arrangement that could be terminated by either party with no notice required Multinational looking to offshore manufacturing Average profit over last three years of the plumbing business = $585,000pa Property or financial resource? Property v financial resource How do you treat a business that can t be sold? Case Study Instructions were to value a loan book Husband operates a short term money lending business (bridging finance) Only borrows and lends to people known to the Husband Approx. $10m in loans Average profit over last three years = $1,000,000pa Property or financial resource? 24 12

13 Can a business have a negative value? Can a Business have a Negative Value? 26 13

14 Case Study Franchise Restaurant 8.5 years on lease remaining Business Assets: Cash / Rental Bond $ 50,000 Stock $ 10,000 Equipment / Fit-out $ 500,000 Franchise Purchase $ 50,000 $ 610, Case Study (Cont.) Oct-16 Oct-16 Total Total Total Total $ $ $ $ Total Income 199,722 1,188, ,663 1,189,345 Total Cost Of Sales 81, , , ,659 Gross Profit 118, , , ,687 Expenses Total Expenses 236, , , ,527 Operating Profit (118,142) (18,775) (34,771) (64,840) Other Income Total Other Income 110, Other Expenses Total Other Expenses 27, ,773 51, , Net Profit / (Loss) (35,806) (172,243) (85,749) (217,287) 14

15 What is Value? The amount which a prudent investor would be prepared to pay; in order to receive the expected future earnings (profit / cashflow); having regard to the level of risk attributed to the investment (risk). What return will the owner achieve? Cashflow Return on realisation 29 Case Study (Cont.) Oct-16 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Total 01/11/16 to 01/11/17 to 01/11/18 to 01/11/19 to 01/11/20 to 01/11/21 to 01/11/22 to 01/11/23 to 01/11/24 to $ 31/10/17 31/10/18 31/10/19 31/10/20 31/10/21 31/10/22 31/10/23 31/10/24 31/03/25 Total Income 1,189,345 1,189,345 1,189,345 1,189,345 1,189,345 1,189,345 1,189,345 1,189,345 1,189, ,031 Total Cost Of Sales 424, , , , , , , , , ,681 Gross Profit 764, , , , , , , , , ,350 Expenses Total Expenses 829, , , , , , , , , ,257 Operating Profit (64,840) (149,644) (149,644) (149,644) (149,644) (149,644) (149,644) (149,644) (149,644) (61,908) Other Income Total Other Income Other Expenses Total Other Expenses 152,952 69,742 69,742 69,742 69,742 69,742 69,742 69,742 69,742 28,852 Net Profit / (Loss) (217,287) (219,227) (219,227) (219,227) (219,227) (219,227) (219,227) (219,227) (219,227) (90,694) Period Discount Factor 25% Present Value of Cash Inflow / (Outflow) (196,083) (156,866) (125,493) (100,394) (80,315) (64,252) (51,402) (41,121) (14,530) Net Present Value (830,456) 30 NET PRESENT VALUE OF FUTURE CASH FLOWS (ROUNDED) (830,000) 15

16 Is the business structure a valuable asset or a sunk cost? Business Infrastructure Book value reflects cost not value Market value Basis of value Realisable value if liquidated Examples: Business premises fit-out (premises owned / leased) Specialised equipment R&D costs Websites 32 16

17 Case Study Automated manufacturing factory Operating for 5 years Significant capital expenditure Strong sales growth Historical losses but now profitable Forecast result is strong 33 Case Study Year Ended Year Ended Year Ended Year Ended Year Ended Determination of Future Maintainable Earnings 30-Jun 30-Jun 30-Jun 30-Jun 30-Jun Adopted Value $ $ $ $ BUDGET $ 28.9% 60.7% 37.0% 14.3% Income Sales 9,666,234 12,654,374 20,006,712 27,523,302 31,054,213 31,054,213 Less Discounts / Rebates Given (866,898) (1,311,885) (1,784,912) (2,565,676) (2,524,337) (2,524,337) Net Sales 8,799,336 11,342,489 18,221,800 24,957,626 28,529,876 28,529,876 Total Cost of Goods Sold 6,745,271 8,505,052 11,736,554 15,855,299 18,691,067 18,691,067 GROSS PROFIT 2,054,065 2,837,437 6,485,246 9,102,327 9,838,808 9,838,808 Gross Profit % 21.2% 22.4% 32.4% 33.1% 32.8% 32.8% Less: Expenses Depreciation 167, , ,178 1,050,006 1,124,272 Interest Paid: 303, , ,678 1,320,739 1,311,822 Other Expenses 1,697,013 2,416,792 3,966,868 6,646,771 7,091,774 6,925,888 Total Expenses 2,168,520 3,639,790 5,437,724 9,017,516 9,527,868 6,925,888 Profit before Other Items and Income Tax (114,455) (802,353) 1,047,522 84, ,940 2,912,920 Other Items 89,273 (1,673,515) 95, , ,356 - Profit before Income Tax (25,182) (2,475,868) 1,142, , ,296 2,912, FUTURE MAINTAINABLE EBITDA 2,912,920 17

18 Case Study As at As at As at As at Adopted Surplus Assets SUMMARY & ALLOCATION 30-Jun 30-Jun 30-Jun 30-Jun Net Core and Liabilities OF BALANCE SHEETS Business Assets $ $ $ $ $ $ Assets Cash & Deposits 194, ,234 1,700, , ,505 - Debtors 942,355 1,515,431 2,471,462 3,024,684 2,989, ,000 Stock 618, ,879 1,178,192 2,253,499 1,640,370 - Prepayments 7, ,245 15,869 15,869 - Other Loans Receivable 515, , , , ,151 Plant, Equipment, Fit-out 2,329,708 4,802,812 8,313,190 9,775,223 9,344, ,680 Intangibles 210,305 36,634 68,258 52, ,818,765 7,723,990 14,333,049 16,094,476 14,442,970 1,135,831 Liabilities Trade Creditors and Accruals 1,215,614 2,262,595 1,947,813 3,432,669 3,164, ,092 Employee Entitlements ,271 - Working Capital Finance 1,598,581 1,055,227 1,665,079 2,081,771-2,081,771 Equipment Finance 461, ,830 1,027,768 4,160,406-4,160,406 Other Loans Payable 1,959,898 6,511,448 10,225,589 6,434,054-6,434,054 5,235,908 10,600,100 14,866,249 16,108,901 3,304,848 12,944, Net Assets (417,143) (2,876,110) (533,200) (14,425) 11,138,122 (11,808,492) Case Study DETERMINATION OF BUSINESS VALUE Adopted Comments AND ENTITY VALUE $ Future Maintainable EBITDA 2,912,920 Earnings before interest, tax, depreciation and amortisation Capitalisation Rate 30.0% Capitalisation rate as determined in this report Enterprise Value 9,709,735 Business Value Net Core Tangible Business Assets (Book Value) 11,138,122 Per attached Schedule 4.3 Difference (1,428,387) Conclusion No Goodwill Value = Net Assets 36 18

19 What is Value? The amount which a prudent investor would be prepared to pay; in order to receive the expected future earnings (profit / cashflow); having regard to the level of risk attributed to the investment (risk). What return will the owner achieve? Cashflow Return on realisation 37 Case Study As at As at As at As at Adopted Surplus Assets SUMMARY & ALLOCATION 30-Jun 30-Jun 30-Jun 30-Jun Net Core and Liabilities OF BALANCE SHEETS Business Assets $ $ $ $ $ $ Assets Cash & Deposits 194, ,234 1,700, , ,505 - Debtors 942,355 1,515,431 2,471,462 3,024,684 2,989, ,000 Stock 618, ,879 1,178,192 2,253,499 1,640,370 - Prepayments 7, ,245 15,869 15,869 - Other Loans Receivable 515, , , , ,151 Plant, Equipment, Fit-out 2,329,708 4,802,812 8,313,190 9,775,223 9,344, ,680 Intangibles 210,305 36,634 68,258 52, ,818,765 7,723,990 14,333,049 16,094,476 14,442,970 1,135,831 Liabilities Trade Creditors and Accruals 1,215,614 2,262,595 1,947,813 3,432,669 3,164, ,092 Employee Entitlements ,271 - Working Capital Finance 1,598,581 1,055,227 1,665,079 2,081,771-2,081,771 Equipment Finance 461, ,830 1,027,768 4,160,406-4,160,406 Other Loans Payable 1,959,898 6,511,448 10,225,589 6,434,054-6,434,054 5,235,908 10,600,100 14,866,249 16,108,901 3,304,848 12,944,323 Net Assets (417,143) (2,876,110) (533,200) (14,425) 11,138,122 (11,808,492) 38 19

20 Case Study DETERMINATION OF BUSINESS VALUE AND ENTITY VALUE Adopted Comments $ Future Maintainable EBITDA Capitalisation Rate Enterprise Value - Business Value Limited to This Amount Add/ (Less): Net Surplus Assets / (liabilities) Entity Value 2,912, % Earnings before interest, tax, depreciation and amortisation Capitalisation rate as determined in this report 9,709,735 Business Value (11,808,492) Per attached Schedule 4.3 (2,098,757) 39 Should income tax be taken into account on Div 7A loans? 20

21 Tax on Div 7A loans What is a Div7A loan? (also known as debit loan account ) Anti-avoidance provision of ITAA Only applies to private companies* Loans, advances, other credits to shareholders and their associates Not repaid in full by the date when the company lodges its tax return in respect of the financial year when the loan was made (Note: Division 7A does not catch loans fully repaid by year-end) Company must have a distributable surplus 41 Tax on Div 7A loans Payments not treated as dividends A repayment of a genuine debt owed to a shareholder or its associate. A payment to a company (but not a company acting as a trustee). A payment that is otherwise assessable under another provision of the Act. A payment made to a shareholder or shareholder s associate in their capacity as an employee or an employee s associate. A liquidator s distribution A pre-4 December 1997 loan. A loan fully repaid in the same year

22 Tax on Div 7A loans Consequences if Div7A triggered Recipient shareholder or associate is deemed to have received dividend equal to the amount of the payment, loan or forgiveness Deemed dividend is unfranked 43 Tax on Div 7A loans Avoiding Div7A Repay in full by the date when the company lodges its tax return in respect of the financial year when the loan was made Enter into a commercial loan agreement 7 years maximum terms for unsecured loans 25 years maximum terms for secured loans interest rate set each year based on home loan rates (Currently 5.3%) 44 22

23 Tax on Div 7A loans Should tax be taken into account in determining the pool? Rosati principle tax and realisation costs to be taken into account if reasonably forseeable Elgin & Elgin appeal decision $44 million pool per trial judge 50/50 split Joint expert had noted there would be tax consequence but couldn t quantify until Orders made Trial judge didn t allow for tax consequences Allowed on Appeal by Order that Wife to give indemnity to Husband for 50% of any tax liability incurred as a result of complying with the property orders 45 What amount of tax? see example Tax on Div 7A loans Potential deemed div idend 100,000 Benchmark interest rate 5.3% Loan term (y ears) 7 Discount rate 2.0% Option 1: Repay now Div idend 100,000 Franking credits 42,857 Grossed up 142,857 Tax at highest marginal rates 67,143 less input tax credits - 42,857 Net tax pay able 24,286 Should tax be taken into account in determining the pool? Commercial loan agreement has been entered into Option 2: Repay over 7 years Total Div idend 17,470 17,470 17,470 17,470 17,470 17,470 17, ,292 Franking credits 7,487 7,487 7,487 7,487 7,487 7,487 7,487 52,410 Grossed up 24,957 24,957 24,957 24,957 24,957 24,957 24, ,702 Tax at highest marginal rates 11,730 11,730 11,730 11,730 11,730 11,730 11,730 82,110 less input tax credits - 7,487-7,487-7,487-7,487-7,487-7,487-7,487-52,410 Net tax pay able 4,243 4,243 4,243 4,243 4,243 4,243 4,243 29,700 Company tax on interest 1,458 1,280 1, ,130 Total tax pay able 5,700 5,523 5,336 5,140 4,932 4,714 4,485 35,831 NPV of total tax pay able 5,589 5,309 5,028 4,748 4,467 4,186 3,904 33,

24 Next session Next session 01 Is a written report the best use of your expert? 03 Common mistakes in preparing business valuations 02 What to look for when reviewing a valuation report 48 24

25 Thanks for listening :) 25