Valuing a private company or family business in a divorce settlement
8th September 2021 by Jonathan Talbot
Running your own business can be the fulfilment of a lifelong dream, but it also brings stresses and strains which sometimes contribute to relationship breakdown. It certainly adds complexity when trying to agree a financial settlement after divorce.
‘The key challenge is to achieve a fair settlement without jeopardising the long-term financial health of the business so that the receiving party feels that they have received adequate recompense for giving up claims upon the business whilst the business is not unduly affected by incurring debt to pay to the other party,’ says Jonathan Talbot, head of the family team with Laceys Solicitors. ‘Determining a valuation for any business requires expert evidence as it is a more complex exercise than valuing other matrimonial assets such as the house or savings.’
Obtaining a business valuation
For evidence to be given in court as to the value of a business it will be necessary to obtain an expert valuation of the family business or private company. In order to achieve a fair settlement, it will be necessary to understand what the company or business is worth and what income is generated from it.
It is usual for a single joint expert, normally an accountant, to be appointed so that a true and fair assessment of the value of the business can be made. They will need access to information and business accounts, and this is normally provided by way of ‘disclosure’ when information is provided from the person(s) involved in the business.
If any gaps in this information are suspected, then the expert may request that further information is provided so that they can provide an accurate valuation.
Reviewing a prenuptial agreement
Being aware of the risks to a family business, founders sometimes encourage or even insist that younger family members enter into a prenuptial agreement when they get married to protect established business assets.
If you have such a prenup, then the first step will be to look at this and see what was agreed. It is not uncommon for the capital value of a spouse’s interest in the business to be protected entirely in a prenup, meaning it is ring fenced from the assets to be divided. Sometimes the interest in the business is limited in a certain way, for example, only taking into account certain business assets or ventures.
It is also possible for couples to have entered a postnuptial agreement after marriage, which may impact the business division in the same fashion as a prenuptial agreement can.
Appointing a single joint expert
If you are both able to agree, you may wish to consider jointly appointing a single joint expert to value the business, as the court would usually require this to be done in any proceedings for a financial remedy order. This means that the expert will be instructed by you and your spouse together; to be paid by you both equally and will provide a single expert opinion for you both. This can save time and costs in arguing over valuations. We can advise you as to the identity of suitable experts who have acted in similar situations with experience of giving valuations of businesses of a similar type to your own.
Factors affecting the valuation
The valuation will depend on a number of factors, including the following:
- Business structure – it is essential for the accurate valuation of the business to understand its ownership structure – whether sole trader, a partnership or LLP, a limited company with one or more shareholders.
- Employment – if one spouse is an employee of the business, rather than an owner, then it may also be necessary to obtain employment law advice depending on the intended settlement of the business asset and whether they are likely to remain involved with the business.
- Business assets – a business in a service industry may have few fixed assets compared to an investment business with a portfolio of bricks and mortar or a manufacturing business with plant and machinery. Invisible assets also need to be considered – such as goodwill and intellectual property (patents, trade marks, designs or copyright).
- Trading pattern – an analysis of historic trading profits and predicted future income may be required. Subscription businesses such as software-as-a-service may benefit from a predictable income stream, while other businesses may be seasonal or subject to fashion or significant market fluctuations. The sustainable earnings of a business over a number of years may need to be determined to arrive at a proper valuation depending upon the nature of the business being examined.
Disputing a valuation
If a business valuation is disputed when for example, the spouse not involved in the business may be skeptical of a low business valuation if the couple previously enjoyed a high standard of living and the owner may seek to downplay its value in a number of ways then these questions should be raised of the expert before further experts are involved. If an expert is not able to answer these questions satisfactorily their report may not be capable of being relied upon in court proceedings.
An expert appointed by the court may request assistance from the court in the discharge of their reporting obligations as they will owe duties to the court to give an accurate opinion of value rather than being swayed by allegiance to either party’s position.
What happens next…
It may be that the business interest can be set off against other marital assets such as an interest in the former marital home or pension funds in order that one spouse can still continue with the business unaffected by claims upon that asset. If that is not possible then looking at instalment payments of capital to be funded out of the business’s future anticipated profits may be an alternative solution depending upon the expert’s assessment of liquidity of the business.
The courts may be very keen to allow a business to continue as a going concern, and this sometimes means generating creative options to enable a fair settlement to be achieved.
How we can help
Obtaining early legal advice is important as valuation evidence may be expensive to obtain and a proportionate approach to settlement should be maintained at all times.
If you would like any further advice on this subject or other family matters please contact either our Family department on 01202 377800 or firstname.lastname@example.org or our Mediation department on 01202 377993 or email@example.com