Business Valuation for Divorce and Financial Remedy
When a business forms part of a divorce or financial remedy settlement, establishing its true value can be one of the most important — and potentially contentious — aspects of the process.
A business is not necessarily an asset that is simply divided equally between the parties. The Court will consider the wider financial circumstances, including the nature and value of the business, the income it generates, the ownership structure and the financial needs of both parties. In many cases, the practical objective is to allow a viable business to continue trading while ensuring that its value is properly reflected within the overall financial settlement.
At The Valuation Team, we specialise in the independent valuation of privately owned and owner-managed businesses. We provide valuations for solicitors, individuals and family-law professionals involved in divorce and financial remedy proceedings, including matters where an independent expert opinion or Single Joint Expert (SJE) is required.
Is My Business Included in a Divorce Settlement?
A business interest can form part of the financial resources considered within divorce proceedings, whether the business is owned jointly or by one spouse.
However, this does not automatically mean that the business itself will be sold or that the other spouse will simply receive 50% of the shares.
The circumstances surrounding the ownership and development of the business will be relevant, as will the value attributed to the business and the wider matrimonial assets. A business established before the marriage may require different consideration from one established and developed during the marriage, but its value may still be relevant when determining a fair financial outcome.
In practice, a business is often retained by the spouse who operates it, with its value being taken into account elsewhere in the settlement. This may involve offsetting the business value against other assets, a transfer of shares or an agreed financial arrangement.
The starting point, however, is understanding what the business is actually worth.
How Is a Business Valued in Divorce Proceedings?
There is no single valuation method that applies to every business.
The appropriate approach depends upon the nature of the company, its financial performance, the assets it owns, the way in which it generates income and the extent to which its future earnings are dependent upon the owner.
For a profitable trading company, valuation will commonly focus on its maintainable earnings and the level of sustainable profit that the business could reasonably be expected to generate going forward.
This is particularly important because the profit reported in the latest set of accounts is not necessarily the same as the profit that a purchaser, investor or independent owner would expect the business to generate.
A proper valuation may therefore require consideration of:
- Historical financial performance and trends
- Maintainable turnover and maintainable earnings
- Exceptional or non-recurring income and expenditure
- Directors' remuneration and benefits
- Related-party transactions
- Dependency upon the business owner
- Customer concentration and recurring revenue
- Management depth and succession
- Working capital requirements
- Debt and surplus cash
- Tangible and intangible assets
- The company's market and competitive position
- Future growth prospects and commercial risks
- Relevant market evidence and valuation multiples
The result should be an assessment of the underlying economic value of the business, rather than simply applying a multiple to the latest reported profit.
What Are Maintainable Earnings?
Maintainable earnings are central to many private company valuations.
Put simply, maintainable earnings represent the level of profit that a business can reasonably be expected to generate on a sustainable basis, having regard to its historical performance and current commercial circumstances.
Reported profits can sometimes give a misleading impression of underlying performance. A business may have benefited from an exceptional contract, incurred unusual expenditure, paid its directors above or below a commercial level, or contain costs that would not continue under different ownership.
Equally, a business may have genuine recurring earnings that are not immediately obvious from a single year's accounts.
For this reason, our valuation process looks across the available financial history rather than relying solely upon the most recent year's results. We assess the quality, consistency and sustainability of earnings before determining an appropriate maintainable earnings figure.
This is particularly important in divorce valuations because the value of the shareholder's interest and the income-producing capacity of the business are not necessarily the same thing.
Why the Owner's Income Can Be Different From the Company's Value
Owner-managed businesses can present particular valuation challenges.
A director and shareholder may receive a combination of salary, dividends, benefits and other payments from the company. The amount actually extracted by the owner does not necessarily represent either the true profitability of the company or the income that the business could sustainably provide.
For example, a company may generate substantial profits but retain significant funds to finance working capital and future growth. Alternatively, reported profits may be depressed because the owner has chosen to take a relatively high level of remuneration.
A valuation therefore needs to distinguish between:
The value of the shareholder's interest
and
The income that the business can reasonably provide to its owner.
These are related but separate considerations, and confusing the two can lead to inappropriate conclusions about the financial position of either party.
What If Husband and Wife Own the Business Together?
Where both spouses are shareholders or directors, the valuation can become more complex.
The fact that each party owns 50% of the shares does not necessarily mean that the economic value of each interest should simply be assumed to be half of a headline company valuation.
The role each spouse plays in the business, the nature of their shareholding, the company's constitutional and shareholder arrangements, their respective remuneration and the degree of reliance upon either spouse may all need to be considered.
This is particularly relevant where one spouse is actively involved in running the company while the other has a more administrative, financial or nominal role. An independent valuation should identify and consider these factors rather than assuming that an equal shareholding automatically produces an identical economic outcome.
Does a Business Have to Be Sold After Divorce?
Not necessarily.
In many cases, selling a functioning business would be commercially undesirable, particularly where the business provides employment, generates a significant income or represents the principal source of financial support for one of the parties.
The valuation therefore provides an important building block for the wider financial negotiations.
Once an appropriate value has been established, the parties and their legal advisors can consider how that value should be reflected within the overall settlement. Depending upon the circumstances, this could involve offsetting the value against property, investments, pensions or other matrimonial assets, transferring some or all of a shareholding, or agreeing an appropriate payment structure.
The important point is that the valuation establishes the financial evidence; it does not determine the settlement itself.
Business Valuation for a Single Joint Expert
Where the value of a business is disputed in financial remedy proceedings, the parties may be required to jointly instruct an independent expert.
A Single Joint Expert (SJE) provides an independent opinion for the benefit of both parties and, where appropriate, the Court. The expert's role is not to advocate for either spouse, but to provide an objective professional opinion based upon the evidence available.
At The Valuation Team, we undertake business valuations for financial remedy proceedings and understand the additional requirements associated with expert work.
Our reports are prepared using our trademarked valuation process, incorporating detailed analysis of the company's financial performance, maintainable earnings, commercial characteristics and relevant valuation evidence.
We maintain £250,000 of Professional Indemnity Insurance, and our valuation reports are independently reviewed by a firm of Chartered Accountants. This provides an additional level of professional scrutiny and quality assurance.
Our approach is designed to produce a valuation that is clear, reasoned and capable of being understood by solicitors, the parties and the Court.
Why Choose The Valuation Team?
A business valuation for divorce is not simply an exercise in applying an EBITDA multiple to a set of accounts.
The quality of the underlying analysis can have a material impact upon the conclusion reached.
At The Valuation Team, we combine financial analysis with commercial judgement to assess what the business is genuinely capable of producing and what a rational market participant might reasonably pay for the underlying economic interest.
Our process considers the quality and maintainability of earnings, the sustainability of the business model, management dependence, customer and revenue characteristics, financial resilience, capital requirements and other factors that can influence value.
Our objective is not to produce the highest or lowest possible number. It is to establish a defensible and independent opinion of value based upon the evidence.
Business Valuations for Divorce and Financial Remedy
The Valuation Team provides independent business valuation services for:
- Financial remedy proceedings
- Single Joint Expert instructions
- Party-appointed expert valuations
- Divorce and matrimonial disputes
- Shareholder and ownership disputes
- Pre-action valuation advice
- Negotiation and mediation
- MBO and settlement discussions
Whether you are a solicitor dealing with financial remedy proceedings or a business owner whose company forms part of a divorce settlement, we can provide an independent assessment of the value of the relevant business interest.
Contact The Valuation Team to discuss your requirements and the appropriate scope of valuation.
