Valuation Expertise for Effective Dispute Resolution

Litigation & Arbitration

BluTrust offers expert valuation for litigation & arbitration, assessing company value during disputes, bankruptcy, and damage awards.

Business Valuation Scenarios in Litigation

If you are involved in litigation, you should consider the relevance of business valuation services. Among the cases in which business value is the primary point of contention are contract losses, divorces, embezzlements, eminent domains, executive compensation, partnership dissolution, SEC investigations, and shareholder disputes.

In order to reach a resolution, a comprehensive analysis of business value is often required, based on proven methodologies, standards, and data. An analysis of business value that is clear, provable, and backed by data can help move difficult conversations forward, enhance understanding, and improve outcomes.

Primary Standards of Valuation

The two primary standards of valuation are “fair market value” and “fair value.” 

The fair market value of something is its open market value. In determining fair market value, eight factors are considered, including the nature and history of the company, the economy and industry outlook, the value of the stock, earnings, dividends, goodwill, sales, the size of the block, and comparable prices.

In litigation, fair value refers to an objective and rational estimate of a product, service, or asset’s value. A fair value is often the value of the business at 100% without discounting for minority holdings. Contractual adjustments may be made to this 100% value, including discounts for lack of marketability or competition from key people, as well as real-world market conditions like capital market access. The adjustment is critical because contracts often require a discount for marketability, control, etc.

For non-controlling interests, fair market value includes adjustments or discounts for lack of control and lack of marketability, whereas fair value represents a pro-rata portion of the 100% value.  

“Book value” and “formula value” are important references in litigation scenarios. These references are not always accurate in determining a company’s true economic value. A company’s book value is its assets minus its liabilities. A book value includes tangible assets like property, but it may also include intangible assets like software, brand names, trademarks, and patents. 

Methods of Valuation

An appraiser will use one of three methods to determine the value of a business based on the type of case, the industry, and the jurisdiction.

Market approach

The value of a company is based on the stock price or transaction price of similar companies in market-based methods. These include the guideline company method and the transaction method. This approach is suitable for companies with industry-comparison companies that are publicly traded or recently sold.

Income approach

The income approach determines a company’s value based on its expected earnings and cash flows. This can be done by examining historical earnings and projections. There are a number of methods that fall into this category, including the capitalization of excess income method and the discounted cash flow method. Almost every time a business generates income, or expects to generate income, this approach is considered.

Asset or cost approach

Using an asset approach, a company’s value is determined by examining its assets, including its intellectual property and real estate. It is usually restricted to asset-dependent companies such as real estate holding companies. 

Capital Allowances

Deductions for the decline in value of depreciating assets are available under the Uniform capital allowance (UCA) system. In addition to the rules for depreciating assets, deductions are allowed for certain other capital expenditure.

Small business entities have the option of choosing simplified depreciation rules. Under these rules, small business entities can claim an immediate deduction if the cost is below the relevant threshold or else add the asset to the small business depreciation pool.

Land, trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets.

The decline in value is generally calculated by spreading the cost of the asset over its effective life, using one of two methods:

Prime cost method – decline in value each year is calculated as a percentage of the initial cost of the asset
Diminishing value method – decline in value each year is calculated as a percentage of the opening depreciated value of the asset
MORE: Australian Taxation Office (ATO) Decline in value calculator.

For most depreciating assets, taxpayers can either self-assess the effective life, or use estimates published by the ATO. Taxpayers can recalculate, either up or down, the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset.

Decline in value of cars is restricted to the car limit. From 1 July 2022, the luxury car tax threshold for luxury cars is $64,741 (it was $60,733 for the year commencing 1 July 2021). Luxury car leases are treated as a notional sale and purchase, with decline in value restricted to the car limit.

The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.

Changes for 2022 and 2023

From 12 March 2020 until 31 December 2020, the asset cost threshold for the instant asset write-off (which is usually only available to small business entities) has increased from $30,000 to $150,000 and the eligibility criteria expended to cover entities with an aggregated turnover threshold of less than $500 million (up from $50 million).

Further, from 12 March 2020 until 30 June 2021 the Backing business investment measure applied to businesses with aggregated turnover below $500 million and provides either:

A deduction of 50% of the cost or opening adjustable value of an eligible asset on installation (existing depreciation rules apply to the balance of the asset's cost), or
For businesses using a small business depreciation pool, a deduction of 57.5% of the cost of the asset in the first year, with the balance added the asset to the small business pool
In addition, from 6 October 2020 to 30 June 2023, full expensing applies to allow eligible businesses with an aggregated turnover of less than $5 billion to deduct the full cost of new eligible depreciating assets. For businesses with aggregated turnover of less than $50 million, full expensing also applies to eligible second-hand assets.

Activity Statement

Businesses use activity statements to report and pay a number of tax obligations, including GST, pay as you go (PAYG) instalments, PAYG withholding and fringe benefits tax. Non-business taxpayers who need to pay quarterly PAYG instalments also use activity statements.

Activity statements are personalised to each taxpayer to support reporting against identified obligations.

Activity statements for businesses may be due either quarterly or monthly. Generally, businesses can lodge and pay quarterly if annual turnover is less than $20 million, and total annual PAYG withholding is $25,000 or less. Businesses that exceed one or both of those thresholds will have at least some monthly obligations. Non-business taxpayers are generally required to lodge and pay quarterly.

Taxpayers with small obligations may be able to lodge and pay annually. Some taxpayers may receive an instalment notice for GST and/or PAYG instalments, instead of an activity statement.

The Australian Taxation Office (ATO) web site provides instructions on lodging and paying activity statements. Detailed instructions are provided for each of the different tax obligations:

GST (Goods and Services Tax)
PAYG (Pay As You Go) Instalments
PAYG (Pay As You Go) Withholding
FBT (Fringe Benefit Tax)
LCT (Luxury Car Tax)
WET (Wine Equalisation Tax)
Fuel Tax Credits