Valuers unable to take COVID-19 into account in a hindsight valuation

Print Friendly, PDF & Email

By Rebecca Brun, Lawyer

An important case to consider in the context of COVID-19 is Pope & Pope,[1] as it highlights the valuation principle that dictates valuers can only take into account information that was known or knowable at the date of the valuation.

A single expert in Pope & Pope performed a hindsight valuation and considered subsequent events to determine the value of the husband’s interest in a successful entertainment group that was formed fours year prior to cohabitation with the wife, being April 1995. The husband’s one quarter share was valued at $1.9million.

The expert explained that such an exercise required the consideration of only information that was known or knowable at the valuation date rather than information that had become knowable because of the passage of time.[2] The expert noted that there are two categories of subsequent events, being:

  1. Those that affect value (which should not be considered unless the facts were knowable at the valuation date); and
  2. Those that do not affect value but provide evidence of the value that existed at the valuation date (which may be considered).[3]

A capitalized future maintainable earnings methodology was applied by the expert in this case and the group’s 1995 Profit and Loss Account was as a starting point for the calculation of maintainable earnings which was adjusted for knowable events, including touring and also merchandise royalties. This resulted in adjusted maintainable earnings of $1.2 million. A 6% capitalization rate was applied resulting in an enterprise value of $7.2million.[4]

Known events considered by the expert were found in publicly available information and documentation from third parties, and included circumstances such as the idiosyncratic features of the group’s character having been established.[5] The Court was satisfied with the expert’s reasoning and accepted the valuation of the husband’s interest of $1.2million[6]

The case highlights that subsequent events must be known or knowable at the date of the valuation for the expert to take them into account in determining the value of a business in family law proceedings. Whilst it is likely that valuers have financial information available from 30 June 2019 or potentially December 2019, the existence of COVID-19 and the financial impact on the Australian economy was not knowable at that time. Whilst COVID-19 can be considered a subsequent event that would affect value, it can not be considered by the valuer as the facts were not known or knowable at the date of the valuation.

 

[1] (2012) FamCA 204

[2] Ibid [121].

[3] Ibid [122].

[4] Ibid [124].

[5] Ibid [126]-[127].

[6] Ibid [125].

For further information, please do not hesitate to contact us.

Get the latest news insights and articles straight to your inbox, simply enter your details.

Form
  • First Name
  • Last Name
  • Email

COVID-19

The silver lining for developers in the NSW Government’s extension of stamp duty exemptions