Where a business is involved in a divorce, understanding its value is often crucial. A business can represent a significant part of a couple’s wealth, but working out what it is worth is rarely straightforward, and outcomes can differ depending on the circumstances.
Why business valuations matter on divorce
A business is often one of the largest assets in a marriage. Unlike property or savings, its value is not always obvious or agreed.
A valuation helps clarify the overall financial position and informs negotiations about what a fair settlement might look like. Without a sense of value, it is difficult to balance the business against other assets or assess whether needs can be met.
What is meant by a business valuation?
A business valuation is an assessment of the value of a person’s interest in a business, such as shares in a company or an interest in a partnership. Valuations also normally cover what income can be drawn, how any value could be extracted (liquidity), and the tax consequences of doing so.
Unless an offer to purchase the business has been received, valuations are usually estimates and hypothetical in nature.
How business valuations are approached
Valuations are typically carried out by an independent expert. Their role is to provide an objective opinion to assist negotiations or the court. In the family law arena valuations are usually instructed and prepared on a ‘single joint expert’ (SJE) basis to ensure any valuation exercise remains proportionate to the parties’ assets, so both parties can have input in to the report, and to reduce the amount of competing evidence.
Different valuation methods may be used depending on the type of business and its circumstances. A business could be valued on its assets (e.g. a company which owns residential property) or based on its future income generation (e.g. a trading company).
It is important to obtain a valuation in advance of settlement discussions and negotiations. They must also be kept up to date to take account of significant changes in trading conditions and/or performance.
Common challenges and misunderstandings
Common misunderstandings include:
That the business is worth whatever it could be sold for. In fact, the expert and the court (the latter making the final decision on the value to be attributed) will focus on fair value.
The business belongs to one party and will be retained by them. The reality is that a business built up during a marriage will be a ‘marital asset’ and its value shared. The court also has the power to transfer a shareholding to an ex-spouse or sell the business, albeit this is rare.
That a business can be ignored because it is illiquid or hard to realise. In fact, a business with limited access to cash can still have significant value and must usually be taken in to account.
How business valuations fit into the wider settlement
A valuation is only one part of the overall financial picture. Business interests are often balanced against other assets, such as property, pensions or cash.
There is often a tension between fairness and liquidity, particularly where most of the wealth is tied up in the business. Risk associated with retaining business assets compared to cash and property should also be factored in. Settlements must therefore be structured carefully, and ensure that both parties’ income and housing needs will be met.
Closing thoughts
Business valuations are an important but often misunderstood part of financial remedy proceedings where a business is involved. They are not an exact science and do not, on their own, determine the outcome. Instead, they provide a framework for understanding value, managing expectations and structuring a fair and workable settlement. Taking early specialist advice can help ensure valuations are approached proportionately and used effectively, allowing negotiations to focus on meeting both parties’ needs while preserving the ongoing viability of the business.
If you would like advice on business valuations in financial remedy proceedings, please get in touch.
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.