Henry Hood examines the valuation of businesses on divorce

Valuing businesses on divorce

Henry Hood, Partner and Head of the Family Department

A key part of the process of negotiating a financial settlement on divorce is assessing the value of the parties’ assets. This can be particularly challenging where one party owns, or has an interest in, a business. Like any other asset, that interest will need to be valued.

Unless the business, or the interest held in it, is to be sold, the valuation would be the expression of opinion by a qualified valuer as to the amount a hypothetical purchaser would pay for it. The valuer, often a forensic accountant, would normally be selected jointly by the parties, and instructed by them both.  Sometimes each party will wish to instruct a “shadow expert” to assist them in considering the expert’s report.

The appropriate approach to valuation will depend on the type of business and the valuer’s preference.

The Net Asset Value approach might be taken where the business’s value lies in its asset base rather than its turnover, such as a property holding company. In such a case, the broad approach would be to value the asset base, less any debt.

The other broad approach, of which there are different versions, is to value the business as a going concern based on the repeatable income that a purchaser might acquire. This is suitable where there are fewer fixed assets of note. Such valuations are both fragile and arguable because they seek to foretell the future. The first step is to identify the repeatable earnings by looking past years and making any necessary adjustments. This figure is then subjected to a multiplier, which depends on the market sector and factors relating to the business itself. Both elements may be subject to debate.

The costs and tax consequences of sale or other disposal will then always need to be factored in, whichever valuation approach is adopted.

Where the relevant business interest is less than 50% of the business, a discount may be appropriate to reflect the lack of management control and difficulty in selling a minority interest. However, where the other owners are close family members this may not be applicable. That can be another significant area of argument.

As will be clear, a formal valuation in divorce proceedings is a significant undertaking. It is therefore important that the scope of the instructions to the valuer, and the information provided to them, are proportionate and accurate, and that the valuer is carefully selected.

For personal advice on this or related issues contact Henry Hood on 020 7412 0050 or Henry.Hood@hunterslaw.com.