How Are Businesses Dealt With On Divorce?

The value of a business and its income will be considered an available resource of the marriage on divorce.

That is not to say that the family court would order a sale of the business. 

The court recognises that the business provides an income, the loss of which may have catastrophic consequences.

In family court proceedings, the value of a business is often determined by a forensic accountant who is jointly appointed by the solicitors representing each spouse to advise on the following:

• The value of the business after tax.
• Whether there is any available cash in the business which can be extracted and, if so, what would be the tax implications.
• What the business earner can reasonably earn from the business now and in the future.

The court typically looks at the value of a shareholding in a business at a true market value.

It will look to obtain a valuation that a willing buyer would pay to a willing seller for that shareholding.

Forensic accountants use various methods:

The Capitalised Future Maintainable Earnings Method 

This method is used when valuing majority shareholdings.

This method seeks to establish the amount of earnings in the form of turnover and earnings before interest, tax, depreciation, and amortisation (“EBITDA”), which a company can sustain for the foreseeable future.

The sum is then multiplied by a factor representing the number of future years’ earnings, which a purchaser might consider acquiring. 

This is referred to as the price/earnings ratio. The price/earnings ratio is obtained by comparing earnings from similar businesses with a known market value, an investor’s required return, and applying a multiple of the representative earnings.

Adjustments will subsequently be made to account for any unusual transactions in a fluctuating market.

Net Assets Method 

This method values a company by reference to the realisable values of its net assets less liabilities.

Adjustments will be made in respect of goodwill and any potential unrecorded liabilities such as deferred tax on the sale of properties or break fees on loan facilities.

This method is usually applied when valuing companies which own property portfolios, for example.

Dividend Yield Method

This method is usually used to value minority shareholdings and is rarely used when valuing private companies.

The valuation method is based on how much money the company makes for its owners.  

The value of a business can be volatile, depending on the economy and market fluctuations.

The family court recognises that the value of a business is not the same as the value of more secure assets, such as the net sale proceeds of a home which can be quantified easily.

However, there is no absolute guarantee that the family court would apply a discount as the risk element of the business would have already been accounted for within the valuation carried out by the single joint expert forensic accountant.

Sometimes a discount may be applied to the valuation of a business if one spouse receives more cash.

Generally, the court prefers to balance the risk-laden assets against the copper-bottomed assets to ensure that each spouse carries a proportionate risk.