Business Valuation for Divorce & Property Settlement | IBV™

The first step is identifying the interest each party holds. A business might be operated through:

Each structure raises different questions, and your lawyer will advise on how the law treats interests such as trusts. For the valuation, what matters is that the subject is defined precisely—the whole business, a parcel of shares, or a unit holding—and that shareholder loans and related-party arrangements are identified. Our guide to enterprise value and equity value explains why the value of the business and the value of a shareholding are different numbers.

Family businesses often pay owners in tax-effective ways: modest salaries, trust distributions, drawings or personal costs run through the business. In a property settlement, the way the business has paid its owners matters for two reasons.

First, the valuer adjusts maintainable earnings, where appropriate, for the market cost of the owner's actual duties. Drawings, dividends and trust distributions are not necessarily operating expenses, so they cannot simply be added back or replaced as though they were wages. Recorded remuneration, personal expenses and the cost of necessary replacement labour must each be examined on their own merits. Our article on normalised earnings and add-backs explains how this is done and why it can raise or lower the value.

Second, the same income can be relevant both to the business value and to one party's earning capacity. Your lawyer will consider how to avoid counting the same benefit twice. A valuation that sets out its remuneration assumptions clearly makes that discussion much easier.

Where a business depends heavily on one party's skills, relationships or reputation, part of its apparent value may reflect that person's future work rather than a transferable asset. How personal goodwill is treated in a property settlement depends on the facts and the law, and it is often debated.

A useful valuation examines how much earnings depend on the owner's continuing involvement and distinguishes transferable business goodwill from owner dependence. Transferability is important, but it is not the only consideration in family law: value to the owner may also be relevant, depending on the circumstances and the appropriate basis of value. The report should explain the basis adopted rather than assume that owner-dependent goodwill has no value. Our guide to goodwill valuation explains the distinction in more detail.

Parties have a duty of full and frank disclosure of their financial circumstances, including relevant business records. The Court explains that disclosure obligations begin during pre-action preparation, before proceedings commence, and continue through the matter. In practice, one party often runs the business and holds the information, while the other has limited access.

That imbalance affects the valuation. Records commonly requested include financial statements and tax returns for several years, general ledger detail, BAS, loan accounts, trust distribution minutes and related-party agreements—our business valuation checklist covers the full list. Where information is withheld or incomplete, the valuer should say so and explain how it limits the conclusion, rather than filling gaps with optimistic or pessimistic assumptions.

A fictional couple jointly own all the shares in a company running a physiotherapy clinic. One partner works in the clinic full time; the other manages bookkeeping two days a week. Illustrative figures only.

The $85,000 receivable is an asset of the company, with a corresponding liability of the borrowers. Advisers must reconcile both sides when establishing the overall property pool to avoid double-counting; the $675,000 share value is not the couple's net property-pool value. Recoverability, documentation and any tax treatment require separate examination. A loan-account balance alone does not establish whether individual transactions attract Division 7A consequences; the ATO explains the loan and repayment requirements.

The valuation also notes that a significant share of patients book specifically with the working partner. That dependence must be analysed even if that partner intends to retain the clinic. A sale could involve patient loss, while value to the continuing owner may differ; the appropriate basis of value and supporting assumptions must be explained. The intended settlement outcome does not remove the need to examine owner-dependent earnings and goodwill.

Transferring shares, business assets or property between separating spouses can have capital gains tax, stamp duty and Division 7A consequences. However, potential CGT and other tax liabilities are not automatically deducted from business value or the property pool. Their treatment depends on the circumstances, including the likelihood and timing of disposal and the applicable tax provisions. A possible future sale does not, by itself, justify deducting hypothetical tax. The Rosati principles, discussed in Marcone, explain why this is a fact-specific legal question.

Qualifying marriage-breakdown CGT rollover relief applies automatically when its conditions are satisfied. It generally defers rather than eliminates CGT, and does not resolve every duty or company-loan issue. Obtain legal and tax advice about the proposed transaction, any future disposal and the settlement treatment of liabilities; keep those decisions distinct from the valuation assumptions. The ATO's market valuation guidance explains what it expects where a market value is relied on for tax.