How are Businesses Dealt with During Divorce?

How are businesses dealt with during divorce.
Photo by Microsoft 365 on Unsplash.
Jane Tenquist
Jane Tenquist
Partner and Head of the Family Law Team
Myerson Solicitors

In the context of marriage, a business’s worth and its revenue are regarded as a potential asset.

However, this does not imply that the court will mandate the sale of the business. The court acknowledges that the business generates income and losing it could have disastrous consequences.

During family court proceedings, a forensic accountant, appointed jointly by the solicitors representing each spouse, usually assesses the business’s value.

The accountant provides guidance on various matters, including the business’s after-tax value, whether there is any cash available that can be extracted, and the associated tax implications.

Additionally, the accountant determines what the business earner can reasonably earn from the business now and in the future.

Typically, the court evaluates the value of a shareholding in the business based on its actual market value. It seeks a valuation that a willing buyer would pay to a willing seller for that particular shareholding.

When to value a business?

The valuation of businesses arises when either or both spouses hold an interest in the business.

Such businesses can be valuable as a source of income, but they may also be valuable capital assets in their own regard.

How to value a business on Divorce? 

Forensic accountants use many methods:

The Capitalised Future Maintainable Earnings Method 

The capitalised future maintainable earnings approach is employed when assessing majority shareholdings.

The approach aims to determine the amount of earnings, in the form of turnover and EBITDA (earnings before interest, tax, depreciation, and amortisation), that a company can sustain over the foreseeable future.

The resulting figure is then multiplied by a factor, known as the price/earnings ratio, which represents the number of future years’ earnings a potential purchaser might consider acquiring.

To establish the price/earnings ratio, earnings from similar businesses with a known market value are compared with an investor’s required return, and a multiple of the representative earnings is applied.

Adjustments are made afterward to account for any unusual transactions in a fluctuating market.

Net Assets Method 

Net assets approach determines a company’s worth by considering the realisable values of its net assets minus its liabilities.

Modifications are made to account for goodwill and potential unrecorded liabilities, such as deferred tax on property sales or break fees on loan facilities.

This technique is typically utilised when evaluating firms that possess property portfolios.

Dividend Yield Method

Valuation of minority shareholdings commonly involves the dividend yield method, but it is seldom used for private companies.

The approach is founded on the amount of profit the company generates for its proprietors.

How is a business split in a divorce?

The court has considerable flexibility in handling a business during a divorce and can issue any of the following directives:

  • Transfer of shares
  • Repurchase of shares by the company
  • Payment of a lump sum to the non-business-owning spouse from the business’s available funds
  • Allocation of other liquid funds from the marriage to the non-business-owning spouse
  • Sale of the business
  • A decree for spousal periodic payments

Is any discount to the value of a business made on Divorce?

The worth of a business can fluctuate significantly, depending on market fluctuations and economic conditions.

The family court acknowledges that the value of a business cannot be easily quantified like more secure assets, such as the net proceeds from the sale of a house.

However, the court may not necessarily apply a discount as the risk factor of the business would have already been factored in during the valuation conducted by the single joint expert forensic accountant.

In some cases, a discount may be applied to the businesses valuation if one spouse receives a greater cash share. Generally, the court strives to balance the riskier assets against the more secure assets to ensure that each spouse bears a proportionate risk.

About Jane Tenquist

Jane Tenquist is a Partner and Head of the Family Law Team at Myerson Solicitors.  She set up the Family department at Myerson in September 2012.

Jane’s work focus is in matrimonial finance, particularly involving complex issues relating to trusts and offshore assets.  Jane has enjoyed success in tracing hidden assets and obtaining freezing orders to prevent assets being diverted during matrimonial proceedings.

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