Business Valuations - Part 2

This is blog is part two of a series regarding business valuations under the Family Law Act (FLA) in British Columbia. If you have not read the first post, you can find it here. While part one provided an overview of business valuations in family law generally and how they are used, this blog will dive further into specifics of the valuator, how to use the valuation in court, and what happens if you do not accept a valuation that has been conducted.

1. What is the Role of the Valuator and is it Important?

While the most obvious role of a business valuator is to value a business and prepare a report, a valuator may also assist in a family law matter in other ways such as:

-          Indicating the types of documents you should request from the other party;

-          Assisting you (or the lawyer) in preparing for an examination for discovery of the other party;

-          Assisting you (or the lawyer) during negotiations;

-          Preparing net worth and cash flow statements;

-          Reviewing relevant financial statements; and

-          Reviewing a joint valuator’s report and assisting you (or the lawyer) in understanding the contents of that report and preparing for trial.

2. What Information or Instructions should you Provide to the Valuator?

Many business valuators are aware of the court process and know the requirements and procedures for their reports, but some may not. However, whether the business valuator you hire has this knowledge, it is important to go over important details with the valuator before they begin their report. This is typically done by providing an instruction letter to the valuator which includes:

-          The report must comply with the specifications under Rule 13-6 of the Supreme Court Family Rules;

-          The identity of the company to be valuated;

-          Any assumptions the valuator should make (if there are any);

-          The date of valuation;

-          Whether the shares or assets of the business are to be valued; and

-          Whether a calculation of distributive taxes is to be made.

Additional details and instructions that are also often set out in an instruction letter, if applicable, include:

-          The anticipated date for trial and deadline for the report to be completed;

-          Who will be paying the valuator;

-          A requirement that the valuator copies all counsel/parties on any correspondence;

-          Any requests respecting the valuation of specific property; and

-          Contact information for the valuator to contact the company’s accountant directly, specifying whether counsel needs to be present for those meetings.

3. What Happens if You Disagree with the Valuation?

If you disagree with the valuation of your business or believe the report contains mistakes, you have a few options:

A. Obtain a Shadow Report

A shadow expert is a separate business valuator that you have hired separately from the joint valuator. The shadow expert can help you with all of the items stated in section 1 of this post, and can be hired even if you agree with the valuation. A shadow expert can also do a separate business valuation for you. This valuation will not be admissible in court, but it can be helpful to compare to the joint valuator to determine any inconsistencies. If both reports are similar, it can prove to you that despite your opinion, it may be difficult to challenge the joint report. A shadow expert can also help you understand the joint report and uncover any shortcomings, as well as help you develop cross-examination techniques and questions for trial.

B. Object to the Admissibility of the Valuator’s Report

As stated previously, valuator’s reports must comply with certain specifications under the Supreme Court Family Rules to be admissible in court. If there are any evident issues with the technicalities, you can object to the admissibility of the report on the basis that the report does not meet the formal requirements under the Rules.

C. Cross-examine the Valuator to discount their opinion and/or elicit more favourable evidence for you

To discount the valuator’s opinion outlined in their report and elicit more favourable evidence for you, you can cross-examine the valuator at trial. During cross-examination, you can have the valuator clarify any details in the report and provide context or explanation for parts of the report that you disagree with. Importantly, during cross-examination you have the opportunity to undermine the valuator’s credibility by trying to show bias in the report. If the valuator’s credibility is undermined, the judge may put little weight on the report.

D. Apply for Leave to Tender an Additional Expert Report

You can also apply to have an additional business valuator provide a “critique report” to used as evidence during trial. However, a critique report will only be admissible if the court is satisfied that the report is necessary to ensure a fair trial. The factors the court may consider when determining whether a critique report is necessary are found at Rule 13-4(8) of the Supreme Court Family Rules:

(a) whether the parties have fully cooperated with the joint expert and have made full and timely disclosure of all relevant information and documents to the joint expert,

(b) whether the dispute about the opinions of the joint expert may be resolved by requesting clarification or further opinions from that expert, and

(c) any other factor the court considers relevant

If a critique report is found to be admissible in trial, the critique expert may be called as a witness and cross-examined just as the original joint expert. The opposing party may also challenge the admissibility due to the report’s formal requirements.

Do you own all or part of a business and want to learn more? Please contact our team of Vancouver family lawyers for a consultation.