Business Law: Ben French on the issue of valuing a business in the event of a divorce
- Credit: Archant
THE resolution of financial matters between divorcing spouses regularly includes not only conventional family assets such as the house, savings and pensions but also business assets.
Businesses may be operated by a spouse as a sole proprietor or by the spouses in partnership. The business may be run as a limited company with either or both spouses having a shareholding in the business, and an active or passive role in it.
In a wider context, either or both spouses may be in partnership with others or there may be other shareholders of the limited company and there will be an added complication if those partners/shareholders are family where different considerations may apply.
In most divorce cases the parties agree to the instruction of a single joint expert for the purpose of providing a valuation of that asset. However, a business is not just an asset but an income stream as well and the valuer will also need to evaluate the sustainable earnings by considering all the management information and the building of a cash flow picture.
A multiplier of the earnings will be applied to give a capital sum. Non-standard items would be removed from the accounts before such a calculation. With shares, a discount is usually applied to a minority shareholder. This is in part because of the inability of the owner of such shares to be able to exercise control of the business and a purchaser at arm’s length would hardly be likely to buy them at full value knowing that such control was not available.
The expert will consider any taxation implications which may arise and these will be factored into the figures.
Mr Justice Charles in the case of D v D and B Ltd (2007) urged parties and their advisors in ancillary relief to consider commercial issues such as the ability to raise and pay a capital sum without unduly jeopardising or burdening the business of the paying party. Commercial realities will sometimes mean that, even though the parties themselves would prefer a clean break, a fair result for both would be a periodical payments order.
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With the country in recession the valuation of a business or a party’s share in a business, whatever the medium, is even more art than science and several experts could come up with different views of value, each of which was entirely justifiable. It is for this reason the courts are urging a non-formulaic approach to the valuation process.
At the end of the day, the courts are interested in a fair share of the matrimonial assets and where there are business assets often the parties’ needs will be involved in that process.
: : Ben French is a family law specialist at Blocks Solicitors.