Business assets in divorce
The resolution of financial matters between divorcing spouses regularly includes not only conventional family assets such as the house, savings and pensions but 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, an active or passive role in it, and 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. The valuer will consider whatever documents he requires to including accounts of the business for at least the previous three years. Often where assets are included at book value, those assets will need to be re-valued to give an up to date figure, which can be incorporated into the valuation. This would provide an asset valuation. However, a business is not just an asset but it is an income stream as well and the valuer will 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) 2FLR653 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 clean break was not possible and in such an instance a fair result for both would be a periodical payments order.
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. It is thus important for spouses going through a relationship breakdown to instruct solicitors experienced in the resolution of family finances where businesses are involved so that the appropriate experts can be identified to help. It is entirely right that the parties should co-operate fully on gathering together the necessary information and valuations to assist their advisors in helping them to a resolution of matters or in helping the Court to make an Order.
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