The value of any business can easily become one of the most contentious issues during any divorce proceedings. Valuing a business can be a lengthy and costly process.
Here we’ll take a look at how divorce business valuations are commonly achieved, and what happens in the event of a dispute.
What does a divorce court look for?
When a court is considering how matrimonial property will be distributed in respect of a business it will look at the nature of that business, the assets it holds and the income it generates before reaching a final divorce business valuation.
It will begin by examining if the business has an underlying capital value or if it is simply an income-producing asset. An example of this might be a trade or knowledge-based business that has little in the way of business assets but where time and labour are sold.
Valuing a business will not always be appropriate in all circumstances, and consideration will need to be given to the likely value of the business, and the time and costs involved before a forensic accountant is instructed to take a closer look.
The use of valuation experts in divorce proceedings
If there is no simple answer to how much a business is worth or an agreed divorce business valuation cannot be reached, then it may be appropriate to appoint independent valuation experts.
These can be appointed separately by each party’s lawyer or a joint expert may be appointed. These will then calculate a fair market value for the business and report their finding back to the court.
What does a valuation cover?
Typically, an independent valuation will look at:
- The overall valuation of the company.
- The value of any assets owned by the company.
- The value of each party’s shares in the company.
- The level of sustainable remuneration the company provides.
- The liquidity in the company.
What methodology is used to reach a valuation?
Several different methodologies can be used to reach a divorce business valuation. Three of the most commonly used are:
Capitalised future maintainable earnings
Maintainable earnings will usually be calculated by referring to the company’s historical results and forecasts to assess the sustainable level of business profits.
Several adjustments may be made to take account of elements such as owner or manager remuneration, or the addition or deduction of exceptional income and expenses.
The valuation will reflect the value of earnings in the form of turnover or post-tax profits that it’s believed the business can realistically sustain over the near future.
Net assets method
The net assets method places a value on the assets belonging to the business including any stock. It then subtracts the liabilities of that business at a specific date.
A valuation will be based on two different grounds:
- A breakup or forced-to-sell basis that assumes that any assets need to be sold immediately.
- A going concern basis assumes that the assets are not going to be sold but will be valued on the open market and a sale agreed between a seller and buyer.
Dividend yield method
A methodology frequently used in divorce proceedings is the dividend yield method. This is used to value minority shareholdings in a company.
The minority shareholder will not usually be able to impact the affairs of the business due to the lack of control. Instead, they rely on dividends for their investment. It may be used when one partner was a minority shareholder in their spouse’s company.
What is a business owner’s role in the valuation process?
It’s the responsibility of the business owner during the valuation process to provide the valuer with accurate information and documentation about the business. Failure to do so increases the risk of the valuation being disputed and the process becoming even more contentious and drawn out.
What if I dispute the valuation?
Business valuations are disputed regularly during divorce proceedings. This might be because a particularly low valuation has been reached or it’s believed assets are being hidden or figures manipulated to distort the valuation.
If you wish to dispute the valuation or you feel that the true nature of income or assets of the business has been hidden, then it may be necessary to obtain a court order to secure specific information.
An independent valuer will be experienced in scrutinising business accounts as well as company structures and they will be able to advise about how best to proceed.
If you find yourself in the need of a divorce business valuation, please contact Bee-Lean Chew at bee.chew@wildercoe.co.uk
