What’s it worth to you? – Valuing businesses in divorce proceedings
A more difficult aspect of financial relief on divorce, is how to factor in a business which may be owned by a spouse.
In order to advise on how financial assets of a marriage should be divided upon divorce, we need to know how much these assets are worth and how liquid they are.
In some cases, a business interest will be little more than an income stream and it will be treated as such as part of the income / mortgage capacity of a party to the divorce.
In other cases, business or partnership ownership can mean a valuation of the shareholding / partnership needs to be carried out.
For a party to the marriage, who has little knowledge or understanding of company values, finding out how much it is worth to them on divorce can be very intimidating. To avoid dealing with business assets could lose a divorcing spouse thousands of pounds. It is vital therefore that solicitors dealing with the financial matters of a divorcing party are alert to what needs to be done in terms of valuing a business. They will identify an expert where necessary.
The expert will then provide a report on the business valuation and liquidity.
How is this done?
Valuation approaches
There are several valuation approaches available which are summarised below:
- Earnings approach
A widely used earnings-based valuation approach involves estimating the maintainable future earnings of a business (its “maintainable future earnings”) and then applying an appropriate profit multiple.
Estimated maintainable future earnings can be determined by examining the profit history of the business and adjusting for non-recurring factors and items that are specific to the current ownership and which distort the reported profits. Consideration is also given to any forecasts prepared by the company (these may also require adjustment). Based upon this, an estimate can be made of the maintainable future earnings of the business.
The multiplier is an indicator of the likely return that an investment will produce. The multiple chosen should fairly reflect the company, its market and the marketability of the business’ shares.
- Dividend yield approach
The dividend basis of valuation considers the payment of dividends and an appropriate rate of return to establish the value of a shareholding. This method is normally used in connection with the valuation of small, uninfluential minority interests, where regular, substantial dividends are being paid.
- Net assets basis
The net assets basis of valuation is commonly used to value an asset intensive business, such as commodities or property investment. Alternatively, the net assets basis of valuation may also be used where a company has no identifiable maintainable earnings or where the assets are under-utilised and considered to be in excess of the trading requirements of the business.
Assets and liabilities generally need to be restated to current market value as at the date of valuation before the net asset value can be calculated. The net assets basis is commonly used as a way of underpinning the valuation derived on the earnings basis. The excess between the net assets of the business and the value calculated on the earnings basis represents the goodwill of the business.
In practice, net assets can only be realised in the event of sale or liquidation. However, where no other meaningful alternative exists, the net assets approach may be referred to.
- Discounted cash flow basis
The Discounted Cash Flow (“DCF”) method is based on the assumption that the value of an asset, such as a company, is equal to the net present value (“NPV”) of its expected future free cash flows. This method relies upon an estimate of future free cash flows which are discounted to represent the value of all of the expected cash flows as at the date of valuation.
This approach requires detailed, medium-term forecasts of operating cash flows and capital expenditure to be produced. This is rare in the context of small to medium privately owned businesses.
- Actual transactions
Another method is to review any previous transactions in this and other companies for a purchase of shares which could significantly influence the value of shares for the purpose of future transactions. This method has the practical difficulty that relevant comparable data is not commonly in the public domain for private companies or partnerships.
How can your solicitor help you with this?
The financial team at Keelys Solicitors has extensive experience in divorces which involve business assets. We have good links with excellent business valuation experts and accountants.
Keelys Solicitors will be able to identify where a report is necessary and how to go about agreeing to instruct an expert. If necessary, in circumstances where a spouse will not agree to an expert valuation being prepared, we can represent you in court proceedings and seek a Court order directing that such a report be prepared.
We are also collaboratively trained and can therefore assist parties to reach an agreement in person together at a four way meeting where both spouses and their solicitors are present. We can even invite an expert business advisor into those meetings so that there is clarity all round.
Our family team is headed by Julie Slater-Williams, based in Lichfield, but available for meetings remotely or in Stone or surrounding. Julie and the team can be contacted using the details below:
Jslater-williams@keelys.co.uk | 01543 420011
mbell@keelys.co.uk | 01543 420031
jcox@keelys.co.uk | 01543 420047
nmalik@keelys.co.uk | 01543 420041
Dividing business interests on divorce or dissolution | MoneyHelper