COURT FILE NO.: FC-22-1273 DATE: 2024/03/19
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Karen Clark Applicant – and – Corey Clark Respondent
Counsel: Philip Augustine, for the Applicant Alexandra Kirschbaum for the Respondent
HEARD: November 20, 21, and December 8, 2023
Reasons for Decision
Valuation of the Respondent’s Company
Somji J.
[1] The parties seek a determination on the value of the Respondent’s company Ottawa Garage Door Systems Inc. (“company”) for purposes of determining equalization of net family property. The parties’ experts have each used a different approach to calculate the value of the company at the time of separation. The Applicant claims the company is valued at approximately $3.3 million whereas the Respondent claims it is valued at approximately $2.2 million.
[2] The parties do not dispute the date of their separation as April 19, 2021. The sole issue to be decided is what is the fair market value of the company at the time of separation.
Factual Background
[3] The parties married on May 12, 2001, and separated on April 19, 2021. They have two children from the marriage aged 18 and 20. The Applicant mother is employed by the Canadian Medical Association. The Respondent father is the sole owner and 100% shareholder of the company incorporated in 2016. The company specializes in installing garage doors in existing and new residential homes. At the time of separation, the company had 7 to 10 employees.
[4] The company operates out of a commercial building which was purchased by a numbered company 2568693 Ontario Inc. (“holding company”). The company pays rent to the holding company for use of its premises. The Respondent has common shares in the holding company but the parties dispute whether that share is a 34% or 100% beneficial interest. However, the parties agree the adjudication of this issue is not before me.
[5] The parties request this court determine the fair market value of the company. Both experts testified that they can likely agree on the contingent disposition costs of the shares once the court has determined the fair market value, and consequently, I need not decide this issue.
[6] The matter proceeded to a two and half day focused hearing. Each party retained an expert to value the company. The Respondent retained Jean-Claude Desnoyers of SME Business Appraisers and the Applicant retained Dave Clarke of Baker Tilley Ottawa LLP. Both parties agreed, and I also found, that each of them are chartered accountants qualified to give expert opinion evidence on the value of the company.
[7] Both experts were asked to prepare calculation valuation reports and both used a going concern approach to valuation under the assumption that the company would continue to operate profitably. Both experts relied on the same definition of fair market value. For the purposes of the valuation, both experts relied on i) the same company financial statements for the years 2016 to 2021; ii) income tax returns endings up to December 31, 2020; and iii) that the company held a loan receivable from the holding company of $496,699 existed at the date of separation.
[8] Both experts acknowledged that calculation valuation reports are inherently limited as compared to “comprehensive” or “estimate” valuation reports. What is significant in this case is that while both experts prepared calculation valuation reports, they used different approaches for determining the value of the company, made different assumptions, and arrived at distinct valuations. As discussed below, Mr. Clarke used a “cash flow approach” whereas in his second report, on which the Respondent relies, Mr. Desnoyers used a “maintainable earnings approach.”
[9] Mr. Desnoyers prepared an initial report dated January 5, 2022 which adopted a Net Adjusted Book Value approach to valuation and determined that the gross company value was $1,859,000 (“SME Report 1”). In this report, Mr. Desnoyers relies exclusively on the net book value of the company’s assets with an adjustment for the period between April 20th and 30, 2021.
[10] After reviewing the Applicant’s expert report of November 2022, and speaking further to the Respondent, Mr. Desnoyers issued a revised report on August 10, 2023, wherein he used the maintainable earnings approach (“SME Report 2”). Under this approach, Mr. Desnoyers determined a level of maintainable earnings that could be expected in the future for this company and multiplied that amount by a multiple.
[11] Mr. Desnoyers acknowledged that after he completed his first report and upon review of Mr. Clarke’s report, he realized he underestimated the company’s extra cash on hand. In SME Report 2, Mr. Desnoyers added $750,000 extra cash to his initial value of the company at $1,472,000 to arrive at a gross company value in the range of $2,000,000 to $2,444,000. He then selected a mid-point of $2,222,000 as the fair market value of the company.
[12] Mr. Clarke’s report is dated November 15, 2022 (“Clarke Report”). Mr. Clarke used the maintainable cash flow approach, also referred to as the enterprise approach. In his report, Mr. Clarke explains the different approaches. In his view, the cash approach is most appropriate where the value of a business is generally a function of its ability to generate cash flows and provide an appropriate rate of return on invested capital which is the case with this company.
[13] Under the cash flow approach, the analysis begins with taking the income figures for each year before taxes, adding back amortization, and reconciling shareholder remuneration at fair market value. The resulting value is the normalized cash flow for a particular year which is then averaged over the review period which in this case was 2016 to April 2021. The maintainable cash flow is then capitalized by an appropriate multiple, i.e.. rate of return. Finally, the value of redundant assets are added to the capitalized value to determine a range for the company’s fair market value.
[14] Applying this approach, Mr. Clarke found that the company’s after tax cash flow was $322,500 per year, applied a multiple ranging from 5.08 to 6.02, and added redundant assets of $1,496,699 consisting of $1 million excess cash on hand and the $496,699 loan. Mr. Clarke found that the fair market value of the company was within the range of $3,140,000 to $3,440,000, and selected a mid-point of $3,290,000 as the fair market value.
[15] Table 1 below summarizes the approach used and valuations of the experts:
| Expert and Report | Date | Approach | Valuation $ |
|---|---|---|---|
| J.C. Desnoyers SME Report 1 | January 5, 2022 | Net Adjusted Book Value | 1,859,000 |
| David Clarke Clarke Report 1 | November 15, 2022 | Maintainable Cash Flow approach | 3,290,000 |
| J.C. Desnoyers SME Report 2 | August 10, 2023 | Maintainable Earnings approach | 2,222,000 |
[16] The experts do not dispute, as supported in the literature, that if properly applied, both the cash flow approach and earnings approach should result in the same value for a company, but in this case, the SME Report 2 arrived at a value that was $1,068,000 lower that Mr. Clarke’s report. Mr. Desnoyers attributes this to three issues:
a. Mr. Clarke attributed $1,000,000 to excess working capital consisting of extra cash on hand and inventory and accounts receivables whereas Mr. Desnoyers simply attributed $750,000 cash at hand to the value of the business.
b. Mr. Clarke assumed that the Respondent’s remuneration in 2016 was representative of the fair market value of a company general manager and would have increased by 5% per year compounded annually whereas Mr. Desnoyers accepted the Respondent’s actual income in each year to be representative of fair market value remuneration; and
c. Mr. Clarke adopted the mid-point of the maintainable cash flows between the highest and lowest cash flow value whereas Mr. Desnoyers’ averaging involved heavier weighting of the 2019 and 2020 years.
[17] Mr. Clarke agrees that the distinction in their respective valuations of over a million dollars is attributable in part to experts’ treatment of the Respondent’s renumeration and weighting of risk. As discussed further below, Mr. Clarke disagrees that the distinction in their valuations turns on their treatment of excess working capital.
[18] These distinctions and the extent to which they impact on determining which expert report should be preferred are discussed further below.
[19] In addition to the experts, the Respondent testified as to the operation of the company, his various roles, and his renumeration. The Respondent also called Ms. Kim Martin, the office manager for the company since June 2020.
Position of the Parties
[20] The Applicant argues that Mr. Clarke’s approach and valuation should be preferred because the financial statements since 2016 demonstrate that this company has been profitable since its inception and has been able to maintain a pattern of growth notwithstanding the economic rigours of the COVID-19 pandemic. The Applicant emphasizes that the company has no debt, that it annually retains a large surplus of cash, that both its revenues and net income have grown steadily save for in 2020 where there was a small dip, and the company has paid the Respondent an increased salary over the years.
[21] In contrast, the Respondent argues that Mr. Desnoyers’ approach and valuation should be preferred because it better accounts for company specific risks such as the dependence on large housing developers and the economic uncertainties flowing from the COVID-19 pandemic which was entering its third lockdown in April 2021. While the financial statements do show increased revenues, high cash flow, and increased remuneration to the Respondent, there are explanations for these occurrences and they do not, in and of themselves, undermine the riskiness of the company which should be given considerable weight in assessing the company’s value.
Issue: What valuation best reflects the fair market value of the company at separation?
[22] Section 4 of the Family Law Act, R.S.O. 1990, c.F.3, as am sets out the framework for division of property between married spouses. The value of an asset must be determined at the time of separation and on the basis of its fair market value (“FMV”). See Menage v Hedges (1987), 8 R.F.L. (3d) 225 (Ont. Dist. Ct.) and Rawluk v Rawluk, [1990] 1 S.C.R. 70.
[23] As stated in Debora v Debora, 83 O.R. (3d) 81 (C.A.), at para. 51, valuation is more art, than an exact science; mathematical certainty is not demanded, because it is not possible. Accounting experts apply different approaches in assessing the valuation of the company. The choice of valuation method may depend on the nature of the business.
[24] The Applicant’s counsel argues that where a company is financed from its own cash flow and has no interest bearing debt, such as is the case with this company, the accounting literature supports that the appropriate valuation approach is the cash flow approach. The Applicant argues that the earnings approach is more complex and difficult to explain both with respect to its calculations and the supporting assumptions relied on. Consequently, the earnings approach is not recommenced except in limited circumstances which do not apply to this company. For this reason, the Applicant argues Mr. Clarke’s cash flow approach is preferable.
[25] When asked why he used the earnings approach rather than the cash flow approach particularly for a company that had no interest bearing debt, Mr. Desnoyers explained that he felt comfortable using the earnings approach because the amortization expense was similar to the cost of sustainable capital reinvestment. Mr. Clarke disagrees. He states the amortization expense in this case is distinct from the sustainable capital reinvestment. Moreover, Mr. Clarke views that it is not acceptable valuation practice to use amortization as a proxy for sustainable capital reinvestment because the latter relates to the useful life of the assets in question whereas amortization expense for assets is calculated based on depreciation limits set out in the Income Tax Act, R.S.C, 1985, c. 1 (5th Supp.). The Applicant argues there was no reasonable justification for Mr. Desnoyers not to use the conventional cash flow approach and in doing, Mr. Desnoyers has created confusion and contributed to a lower and incorrect valuation of the company.
[26] Upon review of the materials filed and considering the explanations provided by each expert for why they chose their respective approaches, I am not in a position to make a finding that any one approach should have been preferred in valuing the company. Furthermore, I note that both experts testified that the approaches should generally yield valuations within close proximity to one another except for the fact that in this case, the experts relied on different assumptions. In arriving at my decision on which of the two reports provides an accurate measure of the company’s fair market value, I have relied instead on numerous factors, assumptions, and risk calculations undertaken by each expert in arriving at their valuation.
[27] In this case, I prefer the valuation of David Clarke for the following reasons.
[28] First, I find that Mr. Desnoyers’ report does not adequately consider the entire relevant financial period. Mr. Desnoyers had the financial statements up to 2021, but in his analysis, he did not use the first quarter figures of 2021. He acknowledged that while the revenues and net income of the company did improve considerably in the first quarter of 2021, it was his practice to only use full-year figures in his valuation. I find that by curtailing the financial period to be analyzed, his valuation does not accurately reflect the economic status of the company at the time of separation in April 2021.
[29] Second, I find that Mr. Desnoyers’ failure to include the company’s performance in the first quarter of 2021 undermines his claim that at the time of separation, the company was at higher level of risk because of the uncertainties of the COVID-19 pandemic. The Respondent’s counsel emphasizes that the company’s valuation must be seen through the lens of what was happening in April 2021 when Canada was entering its third lockdown. While I would agree with this as a general premise given that some businesses were struggling during the pandemic, the analysis of how a specific company fared through the pandemic cannot be selectively limited to just the impacts that resulted in 2020, but must include the company’s performance at later stages including up to the parties’ separation in April 2021, which may demonstrate a different dynamic for how particular businesses in particular sectors were faring through the pandemic.
[30] For example, if one looks at the revenue figures, as of April 2021, the company had already earned $1,091,528. Furthermore, the company net income of $184,000 in the first quarter of 2021 which far exceeded its entire net income for the previous year. Mr. Desnoyers failed to consider there first quarter figures. He also refused in his testimony to extrapolate from these figures what the 2021 annual earnings might be unless he knew precisely how the company had performed in the first quarter of 2020.
[31] The financial statements clearly indicate the company’s revenues grew steadily from $1.6 million in 2016 to $2.56 million in 2019. While there was a decrease in 2020 revenue figures when the pandemic commenced (March 2020), that decrease was only $8,000. Furthermore, the gross profit margins of the company averaged 41% while the net profit margins have averaged 13% between 2016 to 2020. The following table reflects the company’s gross revenues and net income between 2016 and 2022:
| Year | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|
| Company revenues $ | 1,617,633 | 1,852,491 | 2,287,184 | 2,560,714 | 2,552,165 | 3,560,594 (As of April 30, 2021: 1,091,528) | 4,156,667 |
| Net income $ | 334,940 | 291,118 | 287,944 | 385,704 | 41,608 | 344,708 (As of April 30, 2021: 184,325) | 502,549 |
[32] I appreciate that revenues are not the only factor that have to be considered in assessing the economic impact of COVID-19. As both experts pointed out, one must also consider the increased cost of supplies during this period which can, in turn, impact the overall profits. Mr. Desnoyers expressed concern about the higher cost of supplies in 2020 and the uncertainty of whether those costs could pass onto consumers in future years which contributed to his higher risk allocation. While Mr. Desnoyers did explain that the Respondent had told him that materials went up 20% in 2020, he did not offer any evidence from industry or his personal discussions with the Respondent that these increased costs could not and were not absorbed by the consumer in future sales particularly when considers the significant revenue and net income figures (after costs) for the first quarter of 2021.
[33] I find Mr. Desnoyers’ failure to properly account for the first quarter revenue figures of 2021 undermines the overall accuracy of his valuation by curtailing the relevant period of analysis and the higher weight he attributed for risk because of the COVID 19 pandemic.
[34] Third, in determining the weight to be given to each year of earnings, Mr. Desnoyers attributed a weight of 40% to the year 2020 because of the uncertainties of the pandemic and increased cost of supplies. While there was a drop in the company’s profit margin in 2020, it cannot be said that this was entirely due to the pandemic. There were other factors at play in the financials in 2020: i) the Respondent took a sizable increase to his pay; ii) salaries and benefits increased to represent to 27.2% of sales which was 6% higher than the average of all the years between 2016 and 2020; and iii) the company purchased a new truck, all of which contributed to a lower net income for 2020. As already noted, by the valuation date of April 2021, the company had returned to revenues indicative of not only average, but rather, above average profitability. There is also no evidence that the Respondent or the company was short on work during the pandemic and consequently, sought to receive any financial or government assistance to stay afloat during the lockdown periods.
[35] I also disagree with the Respondent counsel’s suggestion that Mr. Clarke’s approach failed to attribute sufficient weight to the pandemic in assessing risk. Mr. Clarke considered the entire relevant period up to April 2021 and weighed each year in accordance with the financial performance of the company, which was then averaged rather than assigning, as did Mr. Desnoyer, a significant weight to the low performance in 2020. According to Mr. Clarke, notwithstanding the start of the pandemic in March 2020, there was “extremely high demand” in the construction industry in 2020. The City of Ottawa had forecast increases in housing starts before COVID and this continued despite the pandemic.
[36] Fourth, I also find that Mr. Desnoyers’ choice to use higher multiples for its capitalization rates because of his view that the company was high risk is not supported by the evidence of the company’s performance. Mr. Clarke applied a multiple of 5.55 to the maintainable cash flows whereas Mr. Desnoyers applied a multiple of 2.97342 to the maintainable earnings. While the experts arrived at the choice of multiples differently, generally the lower the multiple used by a valuator, the higher their assumption of risk. By using a higher multiple, Mr. Clarke took the position that the company was not a risky venture and could likely maintain its cash flow into the future. That calculation was based on i) the company’s steady growth over the years; ii) that outside the loan to the holding company, it was effectively debt free; iii) the company was well managed; and iv) operated in a city where demand for housing continues to expand.
[37] Mr. Desnoyers applied a lower multiple suggesting that he viewed the company as a high risk business. His explanation for this was rooted partly in concerns around recovery from the pandemic, but also because of the company’s base clientele. With respect to the latter, Mr. Desnoyers explained that he understood the company relied on two large developers - Minto and another company - for 50% of its business, a third developer for 10% of its business, and individual contractors or homeowners for the remaining 40% of its business. I note, however, that this information about the company’s reliance on large developers did not form part of either of his reports.
[38] While I agree with the general premise that companies that contract with a single developer for their revenues are at higher risk than those who contract with multiple developers, I do not find that risk exists here. The evidence indicates that the Respondent’s company has a sufficiently diversified clientele to protect itself from the loss of contracts from one large developer. There was no evidence presented by Mr. Desnoyers or the Respondent himself that the company has historically dealt with such a loss, or that in 2020, because of the pandemic or otherwise, there was a critical concern that the company would lose contracts from one of its large developers, and if so, that such loss could not be absorbed by contracting with other developers in the region. On the contrary, as Mr. Clarke pointed out, there has been steady growth in the housing sector including in the Ottawa housing market, and such growth was predicted to continue and did continue, notwithstanding the pandemic.
[39] Fourth, I found that Mr. Clarke’s calculation reflects a more objective representation of fair market value of the Respondent’s remuneration as compared to Mr. Desnoyers who relied solely on the Respondent’s representations that his earnings were fair market value.
[40] Mr. Clarke examined the Respondent’s actual income in 2016 of $79,793 and found it to be fair market value income. He then attributed a 5% increase to that income each year compounded annually. As explained by Mr. Clarke, the Respondent is effectively able to pay himself whatever he wants, and therefore, a shareholder’s actual renumeration is not necessarily the most accurate representation of the company’s salaries and benefits for the purpose of measuring the value of a business. The following table reflects the Respondent’s actual earnings and fair market value attributed by Mr. Clarke for the period between 2016 and 2022:
| Year | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|
| Actual $ | 79,793 | 98,520 | 90,123 | 138,344 | 192,099 | 163,731 | 185,277 |
| FMV $ with 5% increase | 80,000 | 84,000 | 88,200 | 92,610 | 97,240 | 102,102 | 107,207 |
[41] Mr. Desnoyers made no adjustment to the Respondent’s income to adjust for fair market value in his first report. He relied solely on the Respondent’s actual income as per the financial statements as fair market value. Later, in preparing his revised report and after he had reviewed Mr. Clarke’s report, Mr. Desnoyers asked the Respondent for additional information about his revenue increases. The Respondent informed him that he had taken on additional tasks due to his father’s illness, worked additional jobs due to the unavailability of employees during the pandemic, and had also earned commissions. The Respondent relied on this information to explain his earlier conclusion that the Respondent’s actual income for the given years was at fair market value, but did not provide any data from industry or elsewhere to support the Respondent’s opinion that this was indeed fair market value.
[42] For example, Mr. Desnoyers did not question the Respondent at the time of the report as to why his own father, who was ill and working less, continued to be paid approximately $90,000 in 2020. He only learned this during trial. The Respondent testified at trial that while the father was working less due to his illness, they were paying him a higher than usual salary to make up for passed years he was underpaid. The bookkeeper Ms. Martin testified that the Respondent’s remuneration was based on a combination of his piecework for installations, commissions, and a salary. She agreed that the Respondent effectively determined his own salary. Neither she nor the Respondent explained how that salary was determined as fair market value for the work done of a general manager. I find that these arbitrary allocations of salaries, both for the Respondent and his father, lends credence to Mr. Clarke’s testimony that shareholders effectively decide what they want to pay themselves. Consequently, their actual salaries in any given year are not necessarily an accurate reflection of fair market renumeration for the work done. Furthermore, a court is entitled to place less weight on a report where the expert’s conclusion is based primarily on information provided to them by the party which can be self-serving: Whebe v Whebe, 2016 ONSC 1445 at para 70; Yovcheva v Hristov, 2019 ONSC 1007 at paras 130 and 141.
[43] The Respondent’s counsel argues that the starting point for Mr. Clarke’s determination of the Respondent’s remuneration at $80,000 (which he then increased by 5% each year) was based on an assumption that this was a fair market value for a general manager in the construction industry without additional research. I note, however, that Mr. Clarke did testify that based on his knowledge of clients in this trade and his review of the financial statements, $80,000 “was not out of line.” Furthermore, it is important to note that neither expert conducted any comprehensive market research on comparable salaries in the industry.
[44] Furthermore, the Respondent acknowledges that his own father was being paid a salary of $90,000 for comparable managerial duties in the past years before he became ill suggesting that the base rate used by Mr. Clarke is not far off the mark. Furthermore, neither Mr. Desnoyers nor the Respondent provided any clear explanation for why that $90,000 figure was underpayment in those years in comparison to managers operating a similar sized business in the same industry. The only evidence offered by the Respondent and Mr. Desnoyers of what is a fair market value remuneration is the actual salary which the Respondent decided himself.
[45] Notwithstanding the absence of industry comparable, I find Mr. Clarke’s approach reasonable because it reflected what a consistent salary increase would be for a managerial position over a period of time for a company of this size and operation rather than the arbitrary allocations determined by a shareholder as reflected in the actual salaries. I accept that the Respondent did engage in installations over and above his managerial duties to a labour shortage in 2020. However, that year was an anomaly. In fact, the Respondent’s remuneration decreased in 2021 and 2022, and 2020, cannot, in and of itself, be an accurate measure of fair market value remuneration for the Respondent’s managerial duties. Therefore, I find Mr. Clarke’s approach to the Respondent’s renumeration to be more fair and reasonable under the circumstances.
[46] Fifth, Mr. Desnoyers did not recognize excess cash or working capital as redundant assets in his initial valuation report. Redundant assets are those assets not need for the operating business. Mr. Desnoyers admitted that it was only upon review of Mr. Clarke’s report that he revised his position and recognized the existence of the excess cash on hand. In his second report, Mr. Desnoyers included $750,000 in excess cash to the company’s valuation. Mr. Desnoyers explained that he did not include an additional $250,000 of inventory or accounts receivable as a redundant asset as did Mr. Clarke because that is not generally done as part of the maintainable earnings approach. I note that both experts also considered the $497,000 loan from the holding company.
[47] Mr. Clarke, on the other hand, attributed $750,000 to excess cash and $250,000 to non-cash excess working capital. According to Mr. Clarke, Mr. Desnoyers did consider the working capital over and above excess cash on hand but did so as part of his under leverage analysis. Therefore, Mr. Clarke testified that the parties are only apart by $61,000 in their treatment of the redundant assets but the redundant assets present differently because of their approaches. In his view, the distinction in their valuations does not turn on their treatment of redundant assets.
[48] While both experts agreed that redundant assets should be added to the value of the company, I find that Mr. Desnoyers’ failure to do so in his initial report and without any clear explanation for this omission reflects poorly on his work and undermines the general reliability of his expert analysis as compared to the work of Mr. Clarke.
[49] The Respondent argues that Mr. Desnoyers’ figure of excess cash on hand/working capital of $750,000 is more accurate because Mr. Desnoyers took into account the uncertainty of the pandemic and accounted for the fact that the company might needs extra cash available to pay suppliers quickly to receive a 2% discount on their materials whereas Mr. Clarke did not take these issues into account. Consequently, the Respondent argues that Mr. Clarke’s valuation should be lowered by $250,000. I disagree.
[50] I find Mr. Clarke provided a reasonable explanation for how he treated the excess cash on hand/working capital. Mr. Clarke’s position was that this was a well run company that had grown steadily with no significant adverse effect from the pandemic. Both the gross and net profit margins as of April 30, 2021, appeared to indicate a return to at least average profitability in the 2021 fiscal year. Furthermore, Mr. Clark was of the view that the excess cash on the balance sheet at valuation date was not required for operating the company because the existing receivables and inventory could be relied on. I find his assumption was reasonable when one consider that the revenues of the first quarter of 2021 were already at $1,091,528, and could be leveraged to pay suppliers.
[51] Finally, I find Mr. Clarke’s assumptions of low risk are reasonable when examined against the company’s performance in the remainder of 2021 and 2022. The jurisprudence is clear that one cannot use hindsight information as a measure for valuation of a company. The rationale for this rule is that a valuation must be based on the knowledge available at the valuation date: Debora v Debora (2006), 83 OR (3d) 81 at paras 46 and 50. However, the one exception to the hindsight principle, including for valuations under the Family Law Act, is that the “actual results achieved after the valuation date may be compared against the projected or forecasted corporate results made by the valuators and used to test the reasonableness of the assumptions made by those valuators:” Debora v Debora (2006) 83 OR (3d) 81 at paras 46-51. In other words, hindsight information “may be used to gauge the reasonableness of valuation assumptions, but it cannot be used to retrospectively determine valuations:” Jackson v Jackson at para 27.
[52] In this case, Mr. Clarke projected an annual cash flow of $322,500 and the actual cash flow for 2021 was $382,316 and for 2022 was $538,333. In contrast, Mr. Desnoyers’ projected earnings were $197,500 which were significantly less than company’s actual earnings for 2021 and 2022. In attributing a higher risk to the company, Mr. Desnoyers’ analysis resulted in a lower company valuation. The 2021 and 2022 financials support the reasonableness of Mr. Clarke’s assumptions regarding risk and undermine Mr. Desnoyers’ assumptions that the company was high risk.
[53] For all these reasons, I prefer Mr. Clarke’s report over Mr. Desnoyers’ report.
[54] The Respondent’s counsel argues that even if I reject Mr. Desnoyer’s report, I am not required to accept Mr. Clarke’s valuation and can determine my own valuation. The Applicant’s counsel cautions that such an approach could invite an accounting error.
[55] I find that Mr. Clarke’s determination that $3,290,000 constitutes a fair market valuation of the company is reliably supported by the analysis set out in his report and his court testimony. Mr. Clarke utilized the cash flow approach commonly used for the valuations of this type of company. His report analyzes the company’s past performance including the first quarter of 2021, addresses excess working capital, treats the Respondent’s remuneration against a reasonable objective standard, and utilizes capitalization rates (i.e. the multiples) that apply a fair risk analysis based on the company’s historical financial performance. In addition, his explanation that amortization is based on the 5-10 year life of the asset and that amortization of motor vehicles is often front end loaded (in this case the purchase of a truck) is reasonable. His approach and findings are consistent with the company’s performance which indicate that this company has had consistent and growing revenues and net profit, has no interest bearing debt, is financed from its own cash flow, is well run, and has been able to effectively compete even through the pandemic in a strong and continually expanding housing market.
Order Sought
[56] There will be an order as follows:
- The value of the Respondent’s interest in the company shall be fixed at $3,290,000 for the purposes of equalization of net family property.
- The parties shall resolve the value of the tax liability associated with the Respondent’s interest in the company at the fixed value of $3,290,000 for the purpose of equalization of net family property. If the parties are unable to resolve the values of the tax liability, they may return the matter before me.
Costs
[57] The Applicant is the successful party on the motion. The parties are encouraged to resolve the issue of costs. If the parties cannot resolve costs for this proceeding, they may file brief written submissions not exceeding two pages exclusive of Bills of Costs. The Applicant shall file her submissions by April 2, 2024. The Respondent shall file his submissions by April 16th and the Applicant will have until April 23rd for a brief reply. Costs submissions are to be sent to scj.assistants@ontario.ca and to my attention.
Somji J.
Released: March 19, 2024