How are businesses dealt with on divorce?

In divorce proceedings, the value of a business and its income will be regarded as an accessible resource of the marriage. It is important to clarify that this doesn’t automatically mean that the family court will mandate the sale of the business. In fact, the court acknowledges that the loss of the business’s income could result in severe consequences.

During family court proceedings, a forensic accountant may be appointed by both spouses’ solicitors to determine the value of the business. This expert will advise on various matters, such as the business’s post-tax value, whether any available cash can be extracted, and the tax implications of such extraction. Additionally, the accountant will assess the business earner’s current and future earning capacity.

When assessing the value of a shareholding in a business, the court typically seeks a true market value. This is determined by considering what a willing buyer would pay to a willing seller for that shareholding.

When to value a business?

In the context of divorce proceedings, the valuation of a business is necessary when one or both spouses hold an interest in the business.

While businesses can certainly serve as a means to generate income, they may also represent significant capital assets in and of themselves.

How to value a business on divorce?

Forensic accountants employ a variety of techniques to arrive at a business’s valuation, including:

1.     The Capitalised Future Maintainable Earnings Method:

This approach is used when evaluating majority shareholdings. It aims to determine the earnings a company can sustain in the foreseeable future in the form of turnover and earnings before interest, tax, depreciation, and amortisation (“EBITDA”). The amount is then multiplied by a factor reflecting the number of years of future earnings that a purchaser may consider acquiring, known as the price/earnings ratio. This ratio is determined by comparing earnings from similar businesses with a known market value, an investor’s required return, and applying a multiple of the representative earnings. Subsequently, adjustments are made to account for any unusual transactions in a fluctuating market.

2.     Net Assets Method:

This method values a company by referring to the realisable values of its net assets less liabilities. Adjustments are made to account for goodwill and potential unrecorded liabilities such as deferred tax on property sales or break fees on loan facilities. This method is typically applied when valuing companies with property portfolios.

3.     Dividend Yield Method:

This technique is commonly used to assess minority shareholdings and is seldom used in the valuation of private companies. It determines the value of the company based on the income generated for its owners.

How is a business split in a divorce?

In divorce proceedings, the court possesses considerable discretion when it comes to handling a business and may issue several orders, including:

• Transfer of shares.
• Company buyback of shares.
• Lump sum payment to the non-business owner from available funds within the business.
• Allocation of other liquid marriage funds to the non-business owner.
• Sale of the business.
• An order for spousal periodical payments.

Is any discount to the value of a business made on divorce?

The value of a business is subject to volatility, influenced by economic conditions and market fluctuations.

In divorce proceedings, the family court acknowledges that the value of a business is not as easily quantifiable as more secure assets such as net sale proceeds from a home.

While the court may not necessarily apply a discount to account for the risk element of the business, as this would have already been considered by the single joint expert forensic accountant who conducted the valuation, it may be necessary in certain circumstances where one spouse receives a more significant share of the cash.

In general, the court aims to strike a balance between risk-laden assets and more secure assets, ensuring that each spouse carries a proportionate level of risk.

Written by Jane Tenquist, Partner and Head of the Family Team at Myerson