Why is a business valued as part of a divorce?
A business is treated as an asset, much like the family home or pension pots. Therefore, a company needs to be valued to have a clear understanding of how much is available when splitting the business in a divorce to ensure the financial settlement is fair.
Splitting wealth and assets is one of the biggest financial challenges in a divorce, so, typically, once the business is valued, parties will negotiate asset offsetting (one person keeps the business whilst the other keeps the family home, for example). Or you could undertake a structured buy-out as part of the financial settlement.
Not sure what a divorce financial settlement is? Make sure to check out our latest advice.
Do I have to get my company valued as part of my divorce?
No, as every case is unique, you may not need a formal valuation as part of your settlement. However, you may want the business to be valued in certain circumstances, including:
- The business is likely to be sold in the next few years, including when retirement is near or a buy-out is expected
- The capital in the accounts is thought to be undervalued
- The accounts show substantial capital assets, sizeable profits, and turnover
- There is a complex business structure that involves trusts and holding companies
- There are concerns about the liquidity of the business
- There are suspicions that not all the accounts have been disclosed
If you find yourself in this situation, our divorce lawyers work alongside our forensic accountants to uncover any hidden assets to ensure your settlement is as fair as possible. Reach out to our team to find out more.
Who values a business for divorce?
A business is valued by a forensic accountant, also referred to as a Single Joint Expert (if they are instructed jointly with your spouse/civil partner). These experts have the necessary specialist training and knowledge for litigation in court. Their appointment and the standards of their report are strictly governed by Part 25 of the Family Procedure Rules (FPR).
This ensures that they are impartial in court, providing a valuation that meets the high evidentiary standards required for litigation. For example, they are able to provide a fair market value which identifies hidden assets, discover a business’s true maintainable profit, and assess liquidity.
When is a business valued in a divorce?
Typically, a company valuation happens during the financial disclosure stage of the divorce process. This usually happens through the Form E financial disclosure, with an estimated value provided. If necessary, a court will direct that a formal valuation be made, usually in the first appointment hearing (FDA). This usually happens if you and your ex are in disagreement about the estimated value.
Your business valuation should be both completed and reviewed before your financial settlement is finalised. This way, the settlement can be negotiated as fairly as possible, as it will be based on facts rather than assumptions.
Can all types of companies be valued?
Yes, the majority of businesses can be valued. However, the way they are valued changes depending on what they do and how they are structured. For example:
- Sole trader: A sole trader controls the business assets, as well as being personally liable for any debts. In a valuation, the income and profitability are most important. However, assets, like vehicles or property, could also be considered.
- Partnership: This could be a partnership with no written agreement, as well as a formal partnership. If there are additional people other than you and your ex, valuing the business will be more complex.
- Limited company: Some people believe that a limited company is protected in a divorce, but this isn’t the case. If you and your ex-spouse own all the shares of your limited company, the valuation should be straightforward. If there are more shareholders, it will be slightly more complicated.
- Limited liability partnership: This combines elements of a partnership and a limited company, ensuring individuals have protection from any personal liability. The valuation focuses on the individual’s share of the profits and their specific capital within the firm.
- Family investment company: Often used for long-term wealth protection, and it typically holds passive assets like property or stocks. Working out how much a family company is worth is almost always based on the market value of the underlying assets, rather than annual turnover.
- Franchise business: You may own the business entity, but with this type of business, you are bound by a franchise agreement that may dictate how it can be sold. A valuation will account for these restrictions, and the extra business value (like chairs, ovens, or stock) is often owned by the franchisor, not the individual.
How is a business valued for divorce purposes?
Typically, valuations of a business are based on market value. Of course, this can be subjective, but under the courts, the value that is accepted is ‘between a willing buyer and a willing seller’. If your solicitor believes this approach wouldn’t be suitable for your unique circumstances, they can ask for the business to be valued differently, but this isn’t always agreed.
What parts of the business are being valued?
Typically, a business is valued on:
- The value of the company
- The value of each party’s shares in said business
- The sustainable remuneration (total compensation an employee or contractor receives in exchange for services performed, including salary, wages, bonuses, commission, and benefits) that can be drawn from the company
- The goodwill of the company (its reputation, brand loyalty and customer relationships)
- Liquidity
Forensic accountants typically use one of four primary methods to value a business for divorce: earnings-based, net asset, discounted cash flow, or dividend yield.
What is an earnings-based business valuation?
An earnings-based business valuation considers the maintainable earnings of the business (the level of profit a business is realistically expected to generate year after year in the future) and compares this against similar companies. In this instance, the earnings are typically:
- Turnover
- EBITDA (earnings before interest, taxes, depreciation, and amortisation)
- Profit after tax of the business
The valuator then uses this information to work out the total market value of the business. The court then uses that value to decide how the other wealth and assets need to be divided between you and your ex-spouse to make the overall divorce settlement fair.
What is a net asset company valuation?
A net asset business valuation looks at what the business owns, rather than what profit it makes. It calculates what would be left if the business ceased trading, sold everything, and paid off any debts.
What is a discounted cash flow business valuation?
A discounted cash flow business valuation estimates the value of the business today based on how much money it is expected to produce in the future.
What is the dividend yield approach?
This method values a company based on the cash it pays to shareholders (also known as the dividends), instead of any physical assets or total earnings. Private company shares cannot be sold as easily as public stocks, so the SJE often applies an illiquidity discount or minority discount to this valuation.
This adjustment reflects the reality that these shares are harder to turn into cash, ensuring the final figure used in the settlement is a realistic representation of their true marketability.
Solicitor’s tip: This methodology is often used in divorce cases where one spouse owns a minority stake in a private company and has no rights to sell the whole business or influence its strategy.
How is the valuation reported?
Typically, valuations are presented in a formal, comprehensive document referred to as an ‘Expert Witness Report’.
UK law means this report needs to adhere to strict guidelines, to ensure the information is impartial and robust, so that it can be used as evidence in court, if needed.
Can I dispute the business valuation?
Yes, either party has the chance to ask the valuator questions about the amount. No valuation outcome is 100% accurate, due to the methodology used and how the information is interpreted.
If you do have any questions, they must meet the following guidelines:
- Any questions must clarify something factual
- They must not introduce new information
- They must not challenge the outcome based on a different opinion
Depending on the questions asked, the report could be amended, but this is extremely rare.
How are business valuation disputes resolved?
In the majority of cases, the first step toward resolution is the appointment of a Single Joint Expert (SJE). This is where a neutral forensic accountant is tasked with providing a balanced, impartial report to the court. As the SJE works for the court, their findings provide a neutral and reliable starting point for negotiations.
Business valuation disputes are a frequent point of contention in proceedings, as one party usually isn’t happy with what will happen to the business as part of the divorce.
If one party does disagree with the SJE’s findings, this is when they can ask questions about the findings.
If disputes continue past this stage, the party can request the court to appoint a ‘shadow expert’ to assess the original report. However, these days, non-court dispute resolution solutions, like mediation, are recommended by solicitors to resolve the valuation dispute. This is typically quicker, cheaper, and less stressful for both parties.
If no agreement can be reached, the court will evaluate the evidence and make a final decision on the business’s value.
What if there is a prenuptial agreement in place?
As prenuptial agreements aren’t legally binding, it means the business could still be ‘fair play’ within the financial settlement. Therefore, even if the agreement includes said company, it may need to be negotiated and potentially valued, depending on the other assets and how fairly they have been divided in the prenup.
Shivi Rajput, Team Leader Partner at our London law office, says:
“That being said, a business which is ringfenced in a properly drafted and executed nuptial agreement will likely be upheld by the courts, provided that the agreement was entered into freely, is fair overall and meets both parties’ needs.”
If you find yourself in this predicament, our lawyers are here to help. They work alongside our internal forensic accountants. By having both experts in your team, you can ensure that your financial settlement is as fair and robust as possible.
Get in contact with our specialists or call us on 0330 159 9450 to have the UK’s biggest team of dedicated family solicitors on your side.
