A recent family law matter, Kurian v Croft, 2018 ABPC 195, stated some key concepts that we see repeat itself when valuing businesses either for family law, purchase & sale or other matters.
Typically, a controlling shareholder, relative to a minority shareholder, can:
- Control the operations and strategic direction of a business;
- Sell, liquidate, dissolve or recapitalize the business;
- Declare dividends or the timing thereof;
- Change the articles of incorporation or by laws;
- Hire or fire management and establish management compensation; and
- Have the business purchase or divest assets.
Why, you ask, did we bring up the controlling shareholder benefits for the above case? The case dealt with whether the income of the Father’s professional corporation be considered in determining his income.
- The Father, a Doctor, testified that, in 2017, his total income was $59,718 and that, in 2016, his total income was approximately $46,000.
- He was on parental leave in 2017 due to the birth of his baby and the age of his twins.
- The Father is the sole Director and majority shareholder of Anil Kurian Medical – Professional Corporation (professional corporation). The Father produced the Financial Statements for his professional corporation for the year ended August 31, 2017. The Statements reveal the Father generated fees for his professional corporation in the amount of $269,604.
The court based on Section 18 of the Child Support Guidelines (Alberta), imputed income to the Dr. Kurian stating that “Professional corporations are created as vehicles for taxation purposes to enable income of professionals to be sheltered in those corporations for use in building their businesses. This does not mean, however, that all the income of such professional corporations should be disregarded for the purposes of child support. To ignore the income of the Father’s professional corporation would not fairly reflect all the money available to the Father for child support.” As such, all of the net earnings of the professional corporation before taxes was attributed as income of the Father. This would apply to other professional corporations including legal, accounting, dental, chiropractic etc. On an Income note, the calculation of net earnings, the Father should be allowed reasonable, legitimate business expenses. This seems fair to us, as the point of income of support calculations from both sides is to arrive at justice for the two sides. Accordingly, any professional should have his/her business expenses should be deducted before arriving at income calculations, so that justice can be arrived at for the two parties.
The ability of the majority to control the operations and strategic direction of a business along with the ability to declare dividends and decide its timing, adds a layer of complexity in certain valuation cases.
We, as part of our Mid-Market Investment Banking Services, value private businesses for sale for purchasers and we find that the ability to control and influence key decisions is, often, not considered by many purchasers. Typically, the vendor anticipates selling the business and attempts to prepare the business for the sale process; This includes putting the businesses’ best foot forward using a variety of methods. One of the most common methods, that we notice, is to under spend on capital expenditure and thus create the impression of better free cash flow figures.
At Minerva Valuation Advisors, we are trained, as business valuators, appraisers, bankers and financial analysts, in a variety of valuation & advisory settings including in tax planning, family law, shareholder disputes and merger & acquisitions / advisory. Please contact us at either 647-367-8457 or at 647-695-0830.