I enjoy going gem hunting (fossicking) with my family. One of the attractions of this that you are never sure what you will find. I find myself in the quiet, learning lessons; persistence and patience, you turn over a rock and you are never sure what will appear.
At Hymans, we are engaged in various different capacities to prepare and critique business valuations. One of those capacities is as a shadow expert in family law proceedings. Recently, I was appointed, on behalf of a wife, to critique an independent expert valuation of a software company that produced software for gaming machines. There were about a dozen entities in the group. The principal entity was a Unit Trust and had traditionally earned income on a royalties basis (under contract) from gaming companies. As a result of contracts being renegotiated to less attractive terms, the group had been losing money for a number of years. The independent expert was even told at one stage that the group had considered appointing a liquidator. The husband who ran the business went to pains to tell the independent expert the future was bleak and there were no prospects of the group returning to profit. However, the group remained open and trading. Why?
In our capacity as a shadow expert, we were provided with a raft of information, balance sheets, profit and loss statements and many bank statements. I started turning over rocks and asking questions, looking for those hidden gems. What I could not figure out was why for a number of years the husband was drawing $350,000 from the business through his drawings account (and I could trace the money on the bank statements), yet each year contributing back to the group by way of capital contributions $800,000 per year. Further, that $800,000 did not appear to be coming from his personal bank statements. Where did the $800,000 per annum come from?
What we found was a diamond. After asking many questions we were put in contact directly with the company accountant. He advised that the company had sold its gaming software to a customer and was being paid off on that sale contract over a number of years. Instead of sale proceeds being disclosed in the profit and loss statement, it was being allocated to capital contributions from the husband.
The independent expert had totally missed this and had valued the goodwill of the business as $zero!
Armed with this information the goodwill was in fact substantial, a win for our client, the wife!
At Hymans, we have many years of experience and act in multiple capacities preparing and critiquing business valuations.
Please contact Ross Mottershead or Ian Hyman if we can be of any assistance.
Ross Mottershead
Divisional Director – Business Valuations & Advisory
