Dealing with divorce is complex and emotionally charged. Throw in a business and issues can become more challenging. Ownership, control and the future of the business all become essential considerations.
What type of business is it?
The type of business will have an impact on the best way to approach its value (and assessing its value) and what steps are necessary to understand this.
Generally, the 3 types of business will be sole trader, partnership or limited companies (either public or private).
Sole Trader: individuals operating a business on their own account. Lines are often blurred between personal and business assets.
Partnership: two or more people working together in business. No shares have been issued. All assets and liabilities would be subject to division between the partners, depending on the structure of the partnership.
Limited Company: separate legal entities and the most common type of business. One or both spouses may hold shares, there may also be third party shareholders.
For the purposes of this blog, we will focus on limited companies. There were 5.6m private sector businesses in the UK at the start of 2024 with 4.9m of those in England and 216,000 in Wales. The ONS reports that in so far as the UK overall, 5.51m were businesses with 0-49 employees, 36,900 businesses with 50-249 employees and 8,000 with 250 employees or more. Businesses and how they are treated on divorce is an issue that will impact lots of separating couples.
Is the business a martial asset?
Regardless of whether they are held by a single spouse, in England and Wales they are generally considered a martial asset.
This is because all assets are capable of being shared, in principle, and therefore full details of the business, its structure and its value need to be understood.
Do you need a formal valuation?
It depends on the business. For instance, if it’s just an income stream, it may not be necessary but certain indicators give rise to one being needed:
- Ages of the parties i.e. is there a chance the business may be sold? Are one or both looking to retire?
- Capital assets – are they significant? Does the company hold land or property?
- Are profits and turnover significant?
- Is there a disparity between profit and lifestyle?
- Are there concerns about liquidity?
- Is there a trust or holding company that complicates the structure?
- Has there been full disclosure?
Legal advice and analysis of the information available is vital before making a decision on the necessity and proportionality of a business valuation.
How is a business valued?
Forensic accountants are often jointly instructed to value a business, the scope of the report and questions being asked by the accountant will be agreed in advance and need careful thought. Experts can be asked to provide opinion not only on the value of the business but issues such as liquidity, maintainable income and tax implications of sale, disposal of one party’s share and appropriate discounts.
What method of valuation will be used?
Generally speaking the following methods would be considered:
Net Asset Basis
The value of the business comes from the assets it hold ie property, land, stock.
Earnings Basis
The profit the business is likely to make in the future or is likely to be able to maintain in the future.
Consideration of the best method or challenging a method adopted by an expert is important to ensuring the value of the business is as accurate as possible.
Asking questions on receipt of report to gain clarity or question analysis is an important aspect of any business valuation.
What is the Court’s role?
The court has to look at establishing the value of the business and how that value should be reflected in the overall division of assets and liabilities for a couple who are divorcing. The relevant legal principles as summarised by Peel J in HO v TL [2023] EWFC 215 are summarised in paragraphs 20-27 of his judgment and further distilled here:
- It is for the court to determine the value, not the expert;
- Valuations of private companies can be fragile and uncertain
- The reliability of a valuation will depend on a number of factors including (i) whether there are applicable comparable (ii) how ‘niche’ the business is (iii) how the business will be valued i.e. net asset or income (iv) the extent of third party interests (v) relevance or not of shareholder agreements (vi) volatility of the figure (vii) the reliability of forecasts (viii) whether the assumptions underlying the report are challenged/in dispute
- As per Martin v Martin [2018] EWCA Civ 2866 the court will need to either (i) fix the value, (ii) sell the asset or (iii) divide the assets in specie knowns as ‘Wells Sharing’ (Wells v Wells [2002] EWCA Civ 476)
- What the court does, will depend on the facts of each case, the following questions may be relevant. Is the business one that has been generated during the marriage? Did one party bring the business into the marriage or did it originate from non-marital wealth? How has the business grown post separation?
- The court recognises there is a difference between those assets which are considered stable / less risky / easier to value and those which are illiquid / risk laden / volatile;
- How the court treats illiquidity or risk comes down to three choices (i) incorporate a discount (ii) allocate resources in a way that reflects illiquidity and risk (iii) apply a court discount;
The Court generally prefers to leave businesses in tact if at all possible, great news for business owners or those with day to day operational control. It will, as part of its discretionary exercise, look at what is the best outcome to ensure there is a balance of the emotional, practical and legal implications of dealing with a business on divorce to ensure fairness but also business continuity.
Generally speaking the court will look to:
Offset
Whilst one spouse may maintain the business it will mean adjustment to other assets to compensate.
Transfer of shares
Provide shares to non-owning spouse
Buyout of shares
One spouse buying out the interest of the other spouse now, or at a later date.
Maintenance
Paying maintenance derived from income for a specified period or other determining event
We can help if any of these issues are relevant to you’re circumstances. Legal advice and guidance when navigating divorce and financial separation is essential to ensuring the right outcomes for you and your family.
We assist mid to High Net Worth clients navigate divorce. You can contact us here.
