Judge approves linear approach to historic business valuations

Written By: and on BUSINESS VALUATIONS, FORENSIC ACCOUNTING NEWS

Growth in Business Value

Some companies grow, some do not. Some grow fast, some grow slow. In the course of growth, there are uncountable factors that may have contributed to the growth in business value, passively or actively.

In an earlier article, we mentioned a particularly interesting SJE valuation assignment in which we were instructed to determine the growth in value from the date of marriage to the date of petition for divorce, and measure the force of “active” and “passive” factors which contributed to such growth.

In the recent English case of WM v HM [2017] EWFC 25, the Hon. Mr Justice Mostyn ruled on both of these issues as follows:

Approach to historical valuation of a business

In WM v HM [2017] EWFC 25, Mostyn J determined the non-matrimonial part of a business value by evaluating its historical value some 30 years prior, when the parties started cohabitating. He preferred the following two time-based approaches to work back the business value retrospectively:-

1. Linear time apportionment, which assumes the business value increased in equal proportions over the years.
2. Discount the current value by 5% which represents “natural value of money.

Mostyn J rejected the exponential growth and stated that:-

…20. The linear approach is the evaluation which I make in this case. It resonates with fairness. It reflects my opinion of the true latency of the business at the time that the marital partnership was formed, and that, intrinsically, value is (at least) as much a function of time as it is of work or market forces. In argument, I asked “how could it be said that a day’s work in 1980 in creating this company was less valuable than a day’s work last week?” In my judgment, the answer is that it could not.”

The chart (below) was illustrated in his judgment.

On this basis, he found that

22. I therefore take the matrimonial element of the business to be £176,634,650 and the non-matrimonial element to be £44,490,350. That is my value judgment on the facts of this case.

Check out more about our Business Valuation services and experience here.


Contact our Experts