Arnold Shields<br />Dolman Bateman & Co Pty Ltd<br />Forensic Accountants<br />www.dolmanbateman.com.au<br />www.dolmanbat...
Fundamentals<br />www.dolmanbateman.com.au<br />Value of an asset is a function of it's future cashflows<br />What is valu...
5 Basic Valuation Methodologies<br />www.dolmanbateman.com.au<br />discounted cash flow,<br />capitalisationof future main...
Discounted Cash Flow (DCF)<br />www.dolmanbateman.com.au<br />Summary<br />The discounted cash flow (DCF) value is the pre...
Discounted Cash Flow (DCF)<br />www.dolmanbateman.com.au<br />Pros:<br />Considered as the most accurate method<br />Basis...
Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Summary<br />Value of Business is equal to Future Maintain...
Process of Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Identification of tangible assets and liabiliti...
Future Maintainable Earnings (FME)<br />www.dolmanbateman.com.au<br />
Future Maintainable Earnings (FME)<br />www.dolmanbateman.com.au<br />Pros<br />Easily understood<br />Commonly Used<br />...
Net Realisable Assets<br />www.dolmanbateman.com.au<br />The value of that shareholding is normally no less than that shar...
Future Maintainable Dividends<br />www.dolmanbateman.com.au<br />Summary<br />The value is equal to present value of the f...
Future Maintainable Dividends<br />www.dolmanbateman.com.au<br />Pros<br />Used in minority interest valuations only, but ...
Definitions of Value<br />www.dolmanbateman.com.au<br />Value to Owner – “The concept of “value to owner” considers and ta...
Common mistakes<br />www.dolmanbateman.com.au<br />#1 - Maths - the numbers just don't add up<br />#2 - Two sets of books<...
Maths Errors<br />www.dolmanbateman.com.au<br />Examples<br />Valuation does not add up<br />Critical Ratios incorrectly c...
Two Sets of Books<br />www.dolmanbateman.com.au<br />Management Accounts, Financial Statements, Tax Returns are all differ...
Rules of Thumb<br />www.dolmanbateman.com.au<br />ROT<br />No evidence to support basis<br />Used by Business Brokers to s...
Treatment of Surplus Assets andFinancing Liabilities<br />www.dolmanbateman.com.au<br />What are Surplus Assets?<br />Exce...
Capitalisation Rate<br />www.dolmanbateman.com.au<br />Have reasons for opinion been given?<br />Positive Factors<br />Neg...
Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Basis of Future Maintainable Earnings<br />Reasons for bas...
Commercial Salary<br />www.dolmanbateman.com.au<br />Basis of Commercial Salary<br />Evidence – Salary Survey etc.<br />Ar...
Summary<br />www.dolmanbateman.com.au<br />Does the valuation use an accepted method of valuation?<br />Has the valuation ...
Questions?<br />www.dolmanbateman.com.au<br />Arnold Shields<br />Dolman Bateman & Co Pty Ltd<br />Ph: 02 9411 5422<br />E...
Upcoming SlideShare
Loading in …5
×

Challenging business valuations in family law

2,735 views

Published on

Understanding and Challenging Family Law Business Valuations:

Learn:

- Fundamentals of Business Valuations
- Finding the most common mistakes made in business valuations
- The secrets to challenging business valuators opinion.

Published in: Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,735
On SlideShare
0
From Embeds
0
Number of Embeds
261
Actions
Shares
0
Downloads
39
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Challenging business valuations in family law

  1. 1. Arnold Shields<br />Dolman Bateman & Co Pty Ltd<br />Forensic Accountants<br />www.dolmanbateman.com.au<br />www.dolmanbateman.com.au<br />Challenging business valuations in Family Law<br />
  2. 2. Fundamentals<br />www.dolmanbateman.com.au<br />Value of an asset is a function of it's future cashflows<br />What is value? Different concepts of value.<br />Family Law = Value to owner<br />Value = Cashflows x risk<br />Income based valuations assume infinite life of business but discount rate means value after 10 years is negligible.<br />
  3. 3. 5 Basic Valuation Methodologies<br />www.dolmanbateman.com.au<br />discounted cash flow,<br />capitalisationof future maintainable profits,<br />notional realisation of assets,<br />value of net tangible assets (on an ongoing concern basis)<br />capitalisationof future maintainable dividends.<br />– Wilde & Wilde [2007] FamCA 1044 (6 September 2007) at 154<br />
  4. 4. Discounted Cash Flow (DCF)<br />www.dolmanbateman.com.au<br />Summary<br />The discounted cash flow (DCF) value is the present value of the expected future streams of cash flows discounted at a rate which reflects interest rates and the risk associated with the business.<br />
  5. 5. Discounted Cash Flow (DCF)<br />www.dolmanbateman.com.au<br />Pros:<br />Considered as the most accurate method<br />Basis for all other valuation methodologies<br />Cons:<br />Rarely is information required available.<br />High level of assumptions required<br />Misunderstood<br />
  6. 6. Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Summary<br />Value of Business is equal to Future Maintainable Earnings x Capitalisation Factor<br />Value of Business is not Value of Company<br />Will use past earnings as a guide for future profitability.<br />
  7. 7. Process of Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Identification of tangible assets and liabilities<br />Revaluation of assets to market<br />Separation of balance sheet into business assets, surplus assets and financing liabilities.<br />Determination of future maintainable earnings<br />Determination of capitalisation rate<br />Value of business = FME x Cap Rate<br />Goodwill = Value of business less Net Business Assets<br />Value of Company = Net Business Assets + Goodwill + Surplus Assets - Financing Liabilities<br />
  8. 8. Future Maintainable Earnings (FME)<br />www.dolmanbateman.com.au<br />
  9. 9. Future Maintainable Earnings (FME)<br />www.dolmanbateman.com.au<br />Pros<br />Easily understood<br />Commonly Used<br />Fewer assumptions than DCF<br />Cons<br />Difficult to apply to high growth companies and those with abnormal capital expenditure requirements<br />
  10. 10. Net Realisable Assets<br />www.dolmanbateman.com.au<br />The value of that shareholding is normally no less than that shareholder’s proportion of the estimated realisable value of the net assets of the company. <br />The notional realisation of assets basis of valuation is normally only applied to businesses which do not produce an annual cash flow, or where, the outlook for a company’s future earnings is either uncertain or the capitalised value of such earnings is less than the net realisable value of the assets employed.<br />
  11. 11. Future Maintainable Dividends<br />www.dolmanbateman.com.au<br />Summary<br />The value is equal to present value of the future maintainable dividends discounted at a rate which reflects interest rates and the risk associated with the business.<br />Used in minority interests only.<br />
  12. 12. Future Maintainable Dividends<br />www.dolmanbateman.com.au<br />Pros<br />Used in minority interest valuations only, but other methodologies available.<br />Cons<br />Does not take into account retained earnings<br />Dividend rate may be subject to other non-commercial considerations (payroll tax)<br />
  13. 13. Definitions of Value<br />www.dolmanbateman.com.au<br />Value to Owner – “The concept of “value to owner” considers and takes into account the benefits to a particular owner even though this may not be based on a hypothetical third party purchaser.” Scott & Scott (2006) FamCA 1379 at 45:<br />Fair Market Value - the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, acting at arm’s length.<br />Special Value – value to a particular purchaser - takes into account synergistic benefits<br />Book Value – value recorded in books<br />
  14. 14. Common mistakes<br />www.dolmanbateman.com.au<br />#1 - Maths - the numbers just don't add up<br />#2 - Two sets of books<br />#3 - Rules of Thumb<br />#4 - Methodology incorrectly applied<br />#5 - Concept of Value - Value to owner<br />#6 – Independence<br />#7 - Adjustments to Future Maintainable Earnings<br />
  15. 15. Maths Errors<br />www.dolmanbateman.com.au<br />Examples<br />Valuation does not add up<br />Critical Ratios incorrectly calculated (Sales Increase, Gross Profit %, Operating Profit %)<br />Balance Sheets, Profit & Loss incorrectly summarised.<br />Wrong amounts used in FME adjustments.<br />Balance sheets not balancing<br />Assets and Liabilities missed <br />
  16. 16. Two Sets of Books<br />www.dolmanbateman.com.au<br />Management Accounts, Financial Statements, Tax Returns are all different<br />One version for Bank and another for Tax<br />Incorrect Accounting Treatment of Transactions<br />Cash not declared<br />Intercompany Accounts not agreeing<br />
  17. 17. Rules of Thumb<br />www.dolmanbateman.com.au<br />ROT<br />No evidence to support basis<br />Used by Business Brokers to support price<br />Uneconomic returns<br />Often include owners salary ie. Buying a job<br />
  18. 18. Treatment of Surplus Assets andFinancing Liabilities<br />www.dolmanbateman.com.au<br />What are Surplus Assets?<br />Excess cash, property, investments, intercompany loans, directors loans.<br />Financing Liabilities?<br />Bank Loans, Bank Overdrafts, Directors Loans<br />Hire Purchase, Chattel Mortgage, Leases ?<br />Security over personal or other non-business assets<br />
  19. 19. Capitalisation Rate<br />www.dolmanbateman.com.au<br />Have reasons for opinion been given?<br />Positive Factors<br />Negative Factors<br />Within Reasonable Range<br />
  20. 20. Future Maintainable Earnings<br />www.dolmanbateman.com.au<br />Basis of Future Maintainable Earnings<br />Reasons for basis<br />Past earnings are used as a guide to estimating performance.<br />Sufficient Analysis of Business<br />Adjustments<br />Surplus assets<br />Fringe Benefits<br />Non-recurring income and expenditure<br />
  21. 21. Commercial Salary<br />www.dolmanbateman.com.au<br />Basis of Commercial Salary<br />Evidence – Salary Survey etc.<br />Are they qualified to give opinion in this area?<br />Base Salary or Total Package including Fringe Benefits such as Motor Vehicles<br />
  22. 22. Summary<br />www.dolmanbateman.com.au<br />Does the valuation use an accepted method of valuation?<br />Has the valuation methodology being correctly applied?<br />Does it add up?<br />Have reasons being supplied for opinions?<br />Are reasons for opinions (FME & Cap Rate) supported by evidence?<br />
  23. 23. Questions?<br />www.dolmanbateman.com.au<br />Arnold Shields<br />Dolman Bateman & Co Pty Ltd<br />Ph: 02 9411 5422<br />Email: ashields@dolmanbateman.com.au<br />Website: www.dolmanbateman.com.au<br />

×