Valuing a Family Business in Divorce Proceedings
Divorce solicitors recommend that family businesses are accurately valued in financial remedy court proceedings to achieve a fair settlement.
Separations involving family business ownership can be complicated, as they may include family, corporate, and employment law. The Family Lawyers at OTS Solicitors are experienced in advising on divorce settlements involving business assets.
Contact OTS Solicitors Today for Family Law Advice.
Valuing a family business in divorce proceedings
Many business owners going through a divorce don’t think that their business or their shareholding requires a valuation, generally because they intend to keep it. They may intend to argue that the value is irrelevant as the company is not a family asset. However, the family court is typically of the view that it cannot assess whether an asset is a family asset or its relevance to the financial settlement without knowing the asset’s value.
When a family business may not require a valuation
The circumstances in which a valuation of business assets may not be required include:
- The marriage was of short duration, with no children, and both spouses' reasonable needs can be met from non-business assets.
- A prenuptial agreement ringfencing the business was signed before the marriage, and both spouses are content that their respective needs can be met without recourse to the business assets.
- A husband and wife are equal 50% shareholders or business partners, and both want to continue to run the business together after their divorce. This can be achieved in the right circumstances with a family financial court order and a new shareholder agreement or partnership agreement to protect their interests.
- The business is a shell company that has no assets, as it was set up as a tax-efficient vehicle for freelance or consultancy income. Therefore, the company has no goodwill value and no assets other than the balance in its bank account.
- The business is a property investment company. Therefore, the key to understanding the business's value is to obtain property valuations of the company-owned premises and deduct any secured loans and debt.
- The family business is being sold to a third party, and a valuation was undertaken as part of the sale process. If the sale is genuine, then by the date of the hearing of the financial remedy application, the value of the business will have been quantified by the sale. The husband and wife could agree to retain the share sale proceeds in a bank account until the hearing of the financial remedy application.
Company accountants and their valuation of a family business
A spouse may suggest that the ideal person to value the business or a shareholding is the company accountant, as they are already familiar with the business and its assets. However, there is a risk that if the non-owning spouse is unhappy with the company accountant's valuation of the business, they will want to challenge it and instruct their own expert.
If a spouse objects to a valuation being undertaken by a company accountant, the judge in a financial remedy application will generally be persuaded to appoint a single joint expert to conduct the valuation.
Business valuation by a single joint expert
A single joint expert (SJE) is an expert in forensic accountancy. An SJE can be appointed by family lawyers during negotiations, as part of the family mediation process or by a court order during financial remedy proceedings.
The expert will be sent an agreed instruction letter by the husband's and wife's solicitors. The expert will prepare an independent and impartial report.
Types of family business valuation
How you value a family business depends on the company's nature and asset structure. Whichever valuation method is chosen, it is essential that the accountant looks at the net valuation. In other words, after tax on the sale of a business or shareholding is taken into account.
The accountant will choose the most appropriate valuation method after considering the company's structure and the sector.
Types of business valuation methods include:
- A net book valuation – this type of valuation may be appropriate where there are company assets such as property or stock, but limited active trading.
- Maintainable earnings – this method values the company based on the income yield. This type of valuation may be appropriate for a business with a historic income stream and limited physical assets.
A SJE can also be asked to look at other areas in their report, such as:
- Invoicing practices – especially in a business with a lot of cash transactions.
- Movements in a director's loan account.
The remit of the instructions to the SJE needs to be agreed in a joint letter of instruction. The scope of the instruction must be relevant and proportionate, but asking an accountant to investigate concerns about money disappearing or not being declared can give a husband or wife the confidence to reach a financial settlement, as the accountant has considered their concerns.
Financial settlements where there are business assets
A family business is usually only one aspect of a family's wealth. The husband and wife may own other assets and property jointly or individually, such as a family home, pensions, investments, a buy-to-let property portfolio, or a holiday home.
The family court has the power to order the sale of the business or the transfer of shares. However, in most cases, a family court will not order the sale of a family business and will only order the transfer of shares where one spouse is the majority shareholder and the other has a minority shareholding.
Even if no one is asking the court to order the sale of the business and the division of the proceeds, the court will need an accurate valuation of any shares. The family law judge can then assess the appropriate financial settlement. For example, the court may order that the majority shareholder spouse retain their shares, that the other spouse has the family home transferred into their sole name, and that a pension-sharing order and a spousal maintenance order be made.
A specialist Family Law Solicitor can help you work out what would amount to a fair financial settlement after considering all the assets and the family circumstances. A Divorce Lawyer with business asset expertise can guide you through the financial settlement negotiations and provide robust representation in any financial remedy court proceedings.
Contact OTS Solicitors Today for Family Law Advice.
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