Business valuations in divorce | Our expert witness team explains

The presence of a business that is either jointly or individually owned between the parties in a divorce can make the division of family assets more complicated, and at times, contentious. To ensure that the assets are fairly distributed, the value of the business is independently and professionally determined.

Our team of valuation experts at Price Bailey LLP regularly advises on the value of businesses in divorce and the head of our Strategic Corporate Finance team, Simon Blake, is an experienced expert witness for the Court on Matrimonial/divorce valuations. In this two-part article, our experts explain why you need a valuation in divorce, how it is conducted and what to expect from the process.

Unfortunately, it is fairly common that a couple cannot agree on the value of the assets they own when negotiating their division in divorce proceedings. Few examples of this are better than the process of trying to agree on the value of a family business.

In these circumstances, there is usually no simple answer to how much the business is worth right now, due simply to the lack of an external market for shares.

In addition, if only one-half of the divorcing couple is heavily involved in the business, this can cause further complications in being able to determine the value. Consequently, the appointment of an independent valuation expert to calculate the fair market value of the business is of vital importance in these proceedings.

Valuation experts can be appointed separately, by each party’s lawyer or together as a single joint expert. Often, a single joint expert is appointed when the parties cannot agree on their values, so a completely independent valuation expert undertakes the valuation. This is then reported to the Court and its findings are ruled as the fair market value of the business.

What if I have a pre-nuptial agreement in place?

Pre-nuptial agreements are not legally binding – therefore, even if the agreement extends to include any businesses individually or jointly owned, they will be negotiated during proceedings and therefore, a professional valuation should always be sought.

What is being valued?

Our typical remit is to provide the following:

  • The value of the company,
  • The value of the parties’ shares in that company,
  • The level of sustainable remuneration drawn from company, and/ or
  • Liquidity.

The last two are fairly synonymous in most private owner-managed circumstances (less so for businesses that are asset-rich but cash-poor), where the parties own all or most of the shares.

How are businesses valued in divorce?

Unless the divorcing couple’s lawyers provide specific instructions for how the business should be valued, valuations are conducted on a market value basis. The typical definition of ‘market’ value that is accepted by the Courts is ‘between a willing buyer and a willing seller’. Sometimes, this approach is not appropriate – but that is in very rare cases.

Determining the market value of any business, regardless of whether in divorce proceedings or not, can be determined by any one of a number of methodologies. More detail on these methodologies can be found in our Valuations guide. In the case of divorce, the two most common approaches are a net asset-based approach, or a capitalised earnings basis (a measure of profit multiplied by a relevant multiple, and then adjusted for debt and surplus cash).

In some circumstances, other methodologies are more appropriate. For instance, if the business has highly capital intensive products or highly recurrent revenue streams, then a discounted cash-flow (DCF) method may be better, as the business can accurately forecast when cash is coming in. In circumstances where it is primarily an investment company (e.g. property or stock market investment portfolios) then valuation experts may need to rely on a property advisor or the investment manager to advise on value instead.

As with any valuation of a business, the best methodology to use is often determined by looking at its operations and business model. The timing for the valuation is important too; there are occasions when a valuer is asked to provide the value at more than one particular point in time, which can change both the approach to the valuation and the subsequent outcomes.

A recent example

We provided a valuation on divorce for a capital intensive, manufacturing business. The nature of the business’s operations and structure meant there were a number of unique aspects to consider in the valuation.

Of particular interest was that part of the organisational structure included a partnership that had been held with the current owner’s father. Their father had retired from the business ~10 years ago, so we were asked to value the partnership at the point of their retirement.

It transpired the father had a Partners’ capital account owed to him that, on retirement, he did not receive as consideration and instead was provided as an annuity for, for the rest of his life. With regard to the valuation, therefore, we valued the partnership on the basis of the annuity value, rather than their share in the business, at the point that the father retired.

If you, or your client is currently going through a divorce and looking for a valuation of a business, our team of SCF experts would be happy to support you. Please contact a member of the team using the form below, and we will be in touch.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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