If the Court is asked to make orders in a family law property matter it is required to determine the value of the assets. Care needs to be taken when an accountant is asked to value assets. The accountant should insist upon a detailed briefing note and must be aware of the Experts Code of conduct before commencing work on the valuation. As there are different valuation methodologies careful consideration must be given to determine the most appropriate valuation method to be employed. The fundamental methods of valuation can be summarised to be:
Capitalisation of dividends. This method values the dividend stream and is appropriate in circumstances where the shareholding is a minority shareholding and the shareholder has no effective say in the management of the company and is unable to obtain any such say and thus has no influence on the dividend distribution policy of the company.
Capitalisation of future maintainable earnings (FME). This method is commonly used in relation to a going concern. What is being valued is the profits which will result from continuing trade. This method is appropriate when valuing a controlling interest.
Net assets value. This method requires a valuation of tangible assets and liabilities in order to give a valuation of the net tangible assets of the company. This method is appropriate where the earning capacity provides no real measure of the true share value. The method is applied when valuing controlling interests and considering the value of a minority interest.
Liquidation. This method requires placing a value on shares on the basis of a notional liquidation of a company. It is used in circumstances where a company is operating at a return which is inconsistent with the value of its assets and the shareholder is in a position to wind up the company or where a liquidation may be anticipated. This is a minimal value and defines the minimum amount a minority would receive on the liquidation of the entity.
Discount cash flow (DCF). This methodology involves discounting the future cashflows by discount rates which reflects the rate of return of the entity being valued and the risks inherent in the business being valued. The method is based on the concept that the value of an investment is equal to the future benefits that it will generate, discounted back to the present day to reflect the time value of money. The method is used to determine the present value of minority interests in instances where there is an interest in the equity. However, control is in the hands of another party for a pre-determined period of time.
It is for the court to determine which methodology more accurately reflects the true net value of the particular asset. Indeed, as in Moylan and Moylan (unreported No S2132 of 1992, Baker J, 12/11/92) a court can, and does, reject suggested valuation methodologies in favour of its own assessment of value.
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James Frank - email@example.com
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