Business valuations in divorce

Our expert witness team explains

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The presence of a business that is either jointly or individually owned between the parties in a divorce can make the division of family assets more complicated, and at times, contentious. To ensure that the assets are fairly distributed, the value of the business is independently and professionally determined.

Our team of valuation experts at Price Bailey LLP regularly advises on the value of businesses in divorce and the head of our Strategic Corporate Finance team, Simon Blake, is an experienced expert witness for the Court on Matrimonial/divorce valuations. In this article, our experts explain why you need a valuation in divorce, how it is conducted and what to expect from the process.

Unfortunately, it is fairly common that a couple cannot agree on the value of the assets they own when negotiating their division in divorce proceedings. Few examples of this are better than the process of trying to agree on the value of a family business.

In these circumstances, there is usually no simple answer to how much the business is worth right now, due simply to the lack of an external market for shares.

In addition, if only one-half of the divorcing couple is heavily involved in the business, this can cause further complications in being able to determine the value. Consequently, the appointment of an independent valuation expert to calculate the fair market value of the business is of vital importance in these proceedings.

Valuation experts can be appointed separately, by each party’s lawyer or together as a single joint expert. Often, a single joint expert is appointed when the parties cannot agree on their values, so a completely independent valuation expert undertakes the valuation. This is then reported to the Court and its findings are ruled as the fair market value of the business.

What if I have a pre-nuptial agreement in place?

Pre-nuptial agreements are not legally binding – therefore, even if the agreement extends to include any businesses individually or jointly owned, they will be negotiated during proceedings and therefore, a professional valuation should always be sought.

What is being valued?

Our typical remit is to provide the following:

The value of the company,
The value of the parties’ shares in that company,
The level of sustainable remuneration drawn from company, and/ or
Liquidity.

The last two are fairly synonymous in most private owner-managed circumstances (less so for businesses that are asset-rich but cash-poor), where the parties own all or most of the shares.

How are businesses valued in divorce?

Unless the divorcing couple’s lawyers provide specific instructions for how the business should be valued, valuations are conducted on a market value basis. The typical definition of ‘market’ value that is accepted by the Courts is ‘between a willing buyer and a willing seller’. Sometimes, this approach is not appropriate – but that is in very rare cases.

Determining the market value of any business, regardless of whether in divorce proceedings or not, can be determined by any one of a number of methodologies. More detail on these methodologies can be found in our Valuations guide. In the case of divorce, the two most common approaches are a net asset-based approach, or a capitalised earnings basis (a measure of profit multiplied by a relevant multiple, and then adjusted for debt and surplus cash).

In some circumstances, other methodologies are more appropriate. For instance, if the business has highly capital intensive products or highly recurrent revenue streams, then a discounted cash-flow (DCF) method may be better, as the business can accurately forecast when cash is coming in. In circumstances where it is primarily an investment company (e.g. property or stock market investment portfolios) then valuation experts may need to rely on a property advisor or the investment manager to advise on value instead.

As with any valuation of a business, the best methodology to use is often determined by looking at its operations and business model. The timing for the valuation is important too; there are occasions when a valuer is asked to provide the value at more than one particular point in time, which can change both the approach to the valuation and the subsequent outcomes.

A recent example

We provided a valuation on divorce for a capital intensive, manufacturing business. The nature of the business’s operations and structure meant there were a number of unique aspects to consider in the valuation.

Of particular interest was that part of the organisational structure included a partnership that had been held with the current owner’s father. Their father had retired from the business ~10 years ago, so we were asked to value the partnership at the point of their retirement.

It transpired the father had a Partners’ capital account owed to him that, on retirement, he did not receive as consideration and instead was provided as an annuity for, for the rest of his life. With regard to the valuation, therefore, we valued the partnership on the basis of the annuity value, rather than their share in the business, at the point that the father retired.

What are the unique challenges associated with valuing a business in divorce?

Information exchange

Due to the nature of the circumstances in divorce, the primary challenge is often caused by distrust between the two parties. This can present challenges surrounding what information is shared, how it’s shared and the valuer being able to make a judgement on what is reliable and what is not.

In every divorce situation there is a significant exchange of information and when the valuer comes in, they need to both deal with the direct valuation questions, but also pick up on anything that could impact on it. This extends to aspects where there may be a belief that some of the information provided needs to be taken into consideration, even if it is not directly relevant.

It is natural for individuals to have different recollections or understanding of events that have happened in the business, whether both parties are actively involved in the business or not. However, the valuation expert’s responsibility is to think critically about how or if that information is used, in order to calculate the valuation in light of the right circumstances.

A recent example

We recently completed a report that involved reviewing a significant amount of data regarding the business and the divorce.

In this particular example, one party had understood that there had been offers made by other corporates to purchase the business. There was no clear evidence from data provided that suggested these offers had ever materialised, but the other party believed they had. Therefore, in this situation, we took the decision, having carefully reviewed all the evidence provided, that there was no reliable basis on which we felt we could use it in our valuation conclusion.

However, when constructing the report, we still acknowledged it in our notes because if we had not, one or both parties may think that it had been ignored and provoke questions.

We will always consider everything provided by the parties, whether they have direct involvement in the business or not, but we can only base the valuation on factual evidence, and not individuals’ opinions of what did or did not happen.

One of the advantages of our position as an independent expert is that, if we have a scenario where one party is significantly involved in the business and the other is not, the less involved party should have comfort from the fact that someone who is completely objective and removed from the business is reporting on the value discretely and independently. Our responsibility is to the Court and ensure that we get the facts right in considering the valuation. Any suspicion between the two parties should then be largely removed. The expert’s duty is to the Court, rather than either party.

COVID-19

The COVID-19 pandemic has had a major impact on many businesses for the last two years. This creates a whole raft of additional considerations that a valuation expert will need to look at when assessing a business’s accounts during that period.

The first part is to unpick the events that occurred in the business as a consequence of COVID-19 and understand the impact it had on performance. It is everyone’s hope that the pandemic is a one off event, meaning that businesses should be able to focus now on what future performance is likely.

Some businesses have also had a particularly good performance period during COVID-19 on both volume and, in some cases such as PPE providers, on profit too. That performance is, for many, not going to be repeatable at the same levels as was seen early on in the pandemic, which will have a direct impact on expected profits going into 2022 and beyond.

Putting aside for a moment that we are valuing for divorce purposes, any valuation ought to reflect the future value of the business, rather than the past. Independent valuation experts will be operating on this basis.

How is the valuation reported?

Valuations in divorce tend to be in a formal report format. In the case that we are acting just for one party it might be that it is more of an advisory report, rather than a formal report. However, when acting as a single joint expert then it is always a formal report for the court.

What are the parties’ rights to dispute a valuation?

Each party has the opportunity to submit questions to the expert on the valuation. However, there are certain guidelines surrounding any questions:

they cannot involve the introduction of new information to the situation, and
they cannot be to challenge the outcome based on differences in opinion.
Any questions must only clarify something factual.

Occasionally these questions will result in amendments or supplements to the report – but that does tend to be rare.

Ultimately, any valuation is an opinion, it is not an exact science as the same information can be used and interpreted in a multitude of ways depending on the methodology applied. Therefore, there is always the likelihood that one valuation expert could draw a different conclusion to another. However, the importance comes in how they reached that result and often it comes down to what information was shared with them, and how.

If you, or your client is currently going through a divorce and looking for a valuation of a business, our team of SCF experts would be happy to support you. Please contact a member of the team using the form below, and we will be in touch.

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Price Bailey · Business valuations in divorce: Our expert witness team explains

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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