Businesses can be one of the most valuable assets in a divorce. It may be classed as a major capital asset and/or an income source. The business may be a long-standing venture, perhaps having been passed down the generations to one spouse, or it may be a marital endeavour which commenced a number of years ago, or very recently. The circumstances are endless, and each case, and the business(es) within it, need to be considered on its own facts.
Obtaining early legal advice is key where a business forms part of the negotiations upon divorce. Whether the aim is to retain the business, to be bought out of it, or for it to be sold, we can discuss your priorities, and how your preferred outcome can be achieved. At Ward Hadaway, we understand that the divorce process can seem daunting, but with the right legal advice from expert divorce solicitors, the process can be smoother and less stressful to navigate.
Is a business a marital asset? Is it automatically divided in a divorce?
If a business was established or grew significantly during the marriage, it is classed as a matrimonial asset. Even if a spouse has never worked in the business, it’s capital value and the income it generates are part of the shared matrimonial pot. However, the courts rarely award a physical shareholding or operational control to a non-business-owning spouse.
If a business was owned before the marriage, or if it was inherited, it may be categorised as a non-matrimonial asset. If the independent needs of both parties can be met by other assets, such as the family home or savings, the court will aim for a clean break, allowing the business owner to retain the company in its entirety.
Complications arise where there is a mix of the above situations, for example, there is a generational family business (and so the starting point is that it is a non-marital asset) but that during the marriage there has been significant growth as a result of one or both of the spouses’ involvement (of which the growth is then a marital endeavour and asset). Hence the need to review each business, the history of it, and to obtain a valuation (see below) on a case-by-case basis.
How does the court deal with a family business?
When deciding how to divide a family business, Judges generally work towards one of four primary outcomes:
- Offsetting: The business owner keeps the company entirely, while the other spouse receives a larger share of other matrimonial assets, such as residential property, cash, and/or pension(s).
- Share buy-out: One spouse buys out the other spouse’s corporate shares at an agreed lump sum to assume sole ownership. The spouse receiving the payment will resign from any role that they have within the business, and so they have no ongoing role or involvement in it.
- Co-ownership: In amicable separations, and often in cases where the parties agree that maintaining the business is the best financial decision, the spouses can agree for the corporate structure to remain unchanged, and they continue to run the business together as commercial partners. We can liaise with our Commercial Team to advise upon what documentation should be prepared in this scenario to reflect the new business, rather than marital, relationship.
- Sale of the business: As a last resort, and in rare cases, the company is sold to a third party and the net proceeds are split, or shares are transferred into a trust for the children.
How are business assets valued in divorce?
Valuing a business is outside the scope of a matrimonial solicitor’s expertise. It may be that the business’ accountant can provide a valuation, but there may be concerns that it is not neutral or independent. Therefore in the majority of cases where a business valuation is deemed necessary, an independent forensic accountant is instructed on behalf of both spouses to value the business, value the spouse’s share in it (if different), advise upon the liquidity of the business (i.e. how much cash can be extracted from the business) and it’s future revenue. The cost of the valuation will be dependent upon the size of the business, the complexity of it and the specific questions which are asked of the forensic accountant. The cost could be in the region of £3,000 to £6,000 plus VAT for a typical report, but it could cost upwards of £10,000 plus VAT where there is a complex business structure. The cost is shared equally by the spouses because the report is commissioned for them both, with the forensic accountant providing a neutral standpoint.
Valuations depend heavily on your specific business structure:
Sole proprietorships
This type of business is essentially an extension of the owner, like freelancers, consultants or sole traders, and often has little to no value beyond the income it generates. In these cases, a formal valuation may not be needed because the business is primarily a vehicle for the owner’s work, rather than an asset that can be either divided or sold.
Partnerships
The situation becomes more complex if businesses have one or multiple partnerships and therefore, it is important to consider partnership agreements which may restrict the sale or transfer of shares. If this type of agreement exists, valuations may focus on the spouse’s individual earnings and their ability to obtain income from the partnership.
Limited Companies (Ltd)
The valuation process is more detailed for limited companies, since if a spouse is a sole or majority shareholder, the business may have significant value independent from their involvement. The company’s assets, liabilities, contracts and overall profitability will be considered, but in cases where the business is co-owned by both spouses or there are multiple shareholders, the specific value of the shares held by the divorcing spouse must be determined.
For limited companies, the complexity of the valuation process increases if the company has tangible assets like property, equipment or intellectual property, since these must all be valued separately.
The three core business valuation methods
There are three primary methods which are used when conducting business valuations for divorce. These are used to determine a company’s fair market value and include:
- Future Maintainable Earnings (Income Approach or EBITDA multiple): this is the most common method which estimates the company’s future profitability based on past performance. An industry-specific multiple is then applied to these earnings, and it is most often used for established, profitable companies with stable revenue streams.
- Net Asset Method (Cost Approach): this method determines a company’s worth by calculating the total value of assets, including property, cash and stock, minus all liabilities. This is primarily used for asset-heavy companies, like real estate or holding companies, and it reflects the minimum value of a business.
- Market Comparison Approach: this method values a business by comparing it to similar companies, recent transactions or industry benchmarks, and determining a fair market value by using metrics like Price/Earnings, EBITDA or price-to-revenue ratios. This is often used for businesses operating in industries where there are regular sales and acquisitions, therefore providing a good level of market evidence for comparison.
As part of any valuation, the forensic accountant will often provide a valuation with one of the above methods, but will then cross-check their findings by using another method to arrive at a fair value. Valuation experts will often consider factors such as goodwill, dependence on key individuals, minority shareholdings, marketability discounts, and future maintainable earnings before forming an opinion on value.
Why business valuations are frequently challenged
Valuation figures are routinely disputed during divorce financial settlements for three main reasons:
- Suspected non-disclosure: One party believes company assets have been undervalued, income goes unreported, or directors’ perks are excessive. This can be countered with forensic tracing or emergency freezing orders.
- Double-dipping risks: Disagreements surface when the same corporate income stream is accidentally used to calculate both the capital value of the business and future spousal maintenance.
- Personal goodwill: If success relies entirely on the unique reputation of one partner, the business may hold very little transferable value if they leave.
Proactive options to protect your business
To shield a business from the disruption of a relationship breakdown, consider these legal strategies:
- Pre-nuptial and post-nuptial agreements: Ringfence corporate assets as separate, non-matrimonial property, meaning that they are not then shared in the event of
- Shareholder agreements: Restrict share transfers to non-family members and outline specific valuation methods upon divorce.
- Commercial trusts: Hold corporate equity within a structured trust to protect the lineage of generational family firms.
A Judge within the Family Court has the discretion to consider how strategies such as these will have an impact on the overall financial settlement, having regard to the needs of any children and both spouses.
Speak to our expert Teams
Every business is unique, and so too is its value. Whether you are planning for the future, considering a sale or acquisition, navigating a shareholder dispute, or dealing with family law proceedings, understanding the value of your business and your options is an important first step. Our experienced Family Law and Commercial teams can provide practical, tailored advice to help you make informed decisions with confidence.
If you would like to discuss a business valuation, or any of the issues raised in this article, please get in touch for a confidential, no-obligation conversation about your situation.