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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 secure a fair settlement without compromising the business’s long-term financial stability. The aim is for the receiving party to feel adequately compensated for relinquishing claims on the business while ensuring the business doesn’t incur excessive debt. Valuing a business requires expert evidence, as it is more complex than valuing other matrimonial assets like a 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. For further advice please contact one of our Family Law experts.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.