By Kristy-Lee Burns, Partner, Owen Hodge Lawyers
When you run a business, it represents years of personal sacrifice, strategic investment, and identity – not just a financial asset. However, when a marriage or de facto relationship ends, that business is frequently one of the most substantial assets in the marital pool.
Under the Family Law Act 1975 (Cth), any legal or equitable interest in a business entity, regardless of whether it is operated as a sole trader, partnership, proprietary company, or trust, is considered property subject to division. Determining how to divide assets fairly and equitably requires an accurate, defensible valuation of the business.
Because family law and commercial law closely intersect in these matters, navigating a business valuation requires careful strategic planning.
Here are the key considerations every business owner must understand when valuing a business during divorce proceedings.
Selecting the appropriate valuation methodology
There is no single formula for valuing a business in Australian family law. Courts look for the “Fair Market Value” – the price a hypothetical willing buyer would pay to a willing seller in an open market – or, in certain circumstances, the “Value to Owner”. A qualified valuer or forensic accountant will select a methodology based on the nature, structure, and operational history of the enterprise:
– Capitalisation of future maintainable earnings (FME): The most common approach for profitable, established businesses. It evaluates historical earnings, normalises them to determine maintainable future cash flow, and applies an appropriate capitalisation multiple based on industry risk.
– Net tangible assets (NTA): Typically applied to asset-heavy businesses, investment companies, or entities where earnings are thin or inconsistent. It calculates total tangible assets at market value minus total liabilities.
– Discounted cash flow (DCF): Primarily utilised for high-growth enterprises or businesses with fluctuating, project-based cash flows where historical earnings do not accurately reflect future prospects.
Distinguishing enterprise goodwill from personal goodwill
Goodwill represents the intangible value of a business beyond its net physical assets. In family law property disputes, a crucial distinction must be drawn between enterprise goodwill and personal goodwill:
– Enterprise goodwill: Value tied directly to the business entity – its brand name, location, customer database, operational systems, and proprietary technology. This goodwill is transferable to a new owner and is included in the commercial valuation.
– Personal goodwill: Value linked strictly to the personal skill, professional reputation, or individual relationships of the business owner. If the business cannot generate income without that specific individual’s presence, a hypothetical buyer would not pay for that goodwill. Consequently, personal goodwill is generally excluded or discounted from enterprise value, though it may still inform discussions around future earning capacity.
Financial normalisation and “add-backs”
Financial statements prepared for taxation purposes rarely reflect the true underlying operational profitability of a private business. Forensic accountants undertake a process called “normalisation” to adjust the profit and loss statements.
Key adjustments include setting owner-director salaries to commercial market rates, removing non-recurring expenses or one-off revenues, and adjusting non-arm’s-length arrangements (such as related-party rents or intercompany loans). Discretionary personal expenses run through the business – such as private motor vehicles or personal travel – are also identified and added back to reflect true earnings. Full and frank financial disclosure from both parties is mandatory throughout this process.
The role of the single expert witness (SEW)
To avoid a costly “war of experts” and streamline proceedings, Australian Family Courts strongly encourage or order the joint appointment of a Single Expert Witness (SEW).
The SEW is an independent forensic accountant retained jointly by both parties or appointed by the court. Their duty is strictly to the court, not to either spouse. While parties can engage their own “shadow expert” behind the scenes to review the SEW’s report and identify flaws in assumptions or methodology, courts place primary evidentiary weight on the independent report produced by the SEW.
Timing of the valuation and post-separation contributions
Timing significantly impacts valuation outcomes. In Australian family law, assets are generally valued at the date of mediation or trial, rather than the date of separation.
If a business grows or declines significantly between separation and the final hearing, determining the cause of that movement is critical. If post-separation growth is largely driven by the active, post-separation efforts and skill of the retaining spouse, this can form a powerful argument under section 79 of the Family Law Act regarding contributions. Conversely, broader economic factors or market volatility affecting performance must also be properly contextualised.
Tax obligations and liquidity realities
A high business valuation on paper does not automatically equal liquid cash. If one spouse intends to retain the business and buy out the other spouse’s interest, they must have access to sufficient liquidity or borrowing capacity.
Furthermore, transferring business shares, extracting cash via dividends, or selling underlying commercial assets to fund a property settlement can trigger substantial tax liabilities, including Capital Gains Tax (CGT), Division 7A issues, or stamp duty. Tax liabilities associated with realising asset values must be factored into the overall property settlement structure to ensure the outcome is genuinely equitable.
Final Thoughts
Valuing a business during a relationship breakdown is an intricate blend of accounting standards, commercial realities, and family law principles. Proactive business owners who maintain transparent financial records, establish Binding Financial Agreements (BFAs), and seek joint family law and commercial guidance early are best positioned to protect their business’s ongoing viability while achieving a fair resolution.
About Kristy-Lee Burns
Kristy-Lee Burns is a Partner at Owen Hodge Lawyers and has headed up the Family Law department since 2018. Kristy-Lee has extensive trial experience in complex family law matters involving business entities, commercial structures, and trusts. She holds an LLM Applied Masters with a double major in Family Law and Business Law, equipping her with specialised expertise where commercial law and family disputes intersect. Kristy-Lee focuses on identifying key legal issues early to advocate for just and equitable outcomes for her clients.
www.owenhodge.com.au