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The value of business assets will be taken into consideration on divorce or dissolution of a civil partnership.
As part of the financial disclosure process, it is standard to provide copies of the full sets of the financial accounts for the business for the last two years together with details of all income deriving therefrom in the form of tax returns and directors' loan accounts.
Instructing a forensic accountant
Often it will be necessary to instruct a forensic accountant as a single joint expert to value the business and provide advice on:
- The value of the business owners' shares in the business
- Tax consequences of a sale/transfer
- Whether there is any liquid in the company, i.e., whether there is any cash that can be extracted tax efficiently to fund any settlement
- Any analysis of the business owner's reasonable maintainable income now and in the future
Can my wife claim my business in divorce?
A business interest will be considered as an available resource if it were built up during the marriage or if the marriage was a lengthy one. In a needs case, where there are insufficient resources to meet the needs of the parties, a business interest will be considered as an available resource.
In addition to valuing the interest in a business, consideration should be given to the liquidity of a company by looking at the money that can be drawn from a business to fund a financial settlement on divorce and to consider how much income the business can produce in the future.
An interest in a business is different to the value of a liquid asset such as property and savings, and the court will view shares in a business as being more risk-laden.
Consideration will need to be given to providing parties on divorce or dissolution with a fair division of the more risk-laden business assets and the less risky, otherwise known as 'copper bottomed' assets such as property and cash in the bank.
How will my business be valued on divorce?
Usually, a single joint expert forensic accountant is appointed either by agreement or subject to a court order. The value of the business depends upon what a willing buyer is prepared to pay for the business as a going concern based on its current assets and performance. Although the valuation is based on the open market value, it is quite rare for a business to be sold in divorce proceedings, as this will destroy any income stream deriving from that business upon which both spouses rely.
Forensic accountants employ different methods to value businesses. The forensic accountant will either use the capitalised future maintainable earnings method or the net assets method in cases where the business owner owns the entire share capital of the company. The dividend yield method is employed when valuing minority shares in a business.
Capitalised future maintainable earnings method
This method calculates the amount of earnings, turnover, EBITTDA or post-tax profits of the business. A Multiplier is then applied, representing the number of future earnings a potential buyer might acquire-the price/earnings ratio. This price-earnings ratio is obtained by comparing similar businesses that have a known market value.
Net Assets Method
This calculates the assets of the business after taking into account its liabilities at a specific date, based on alternative assumptions:
- A breakup and sale of the business
- The sale of the business as a going concern.
This method is usually applied when valuing companies which own property portfolios, for example. In this scenario, a chartered surveyor will usually be appointed ahead of a forensic accountant to update the value of the property portfolio before a forensic accountant's report is obtained.
Dividend Yield Method
This method is used when valuing minority shareholdings. A minority shareholder is not able to influence the running of the company and can only rely on dividends. A minority discount may be applied to reflect the minority shareholding.
Effect of COVID 19 and Brexit
The forensic accountant will address the impact of these two factors on the current valuation of the business by analysing the performance of the business prior to these events and assessing the likelihood of recovery within a reasonable timeframe.
How is a business split in a divorce?
The court has wide discretion when dealing with a business on divorce. The following may be ordered:
- A transfer of shares
- A lump sum payment to the non-business from funds available in the business
- By allocating other liquid funds of the marriage to the non-business owner( for example, the non-business owner may recover more of the net proceeds of the sale of the family home or savings and the business owner retains the business.) This may be accompanied by a spousal maintenance order depending on the needs of the parties and the facts of the case
- A sale of the business
- An order for spousal periodical payments
It is very rare for the court to order that a business is sold, and the court will try to avoid the sale of a business where possible.
The court may order the transfer of shares in a company from one party to another. This would usually be appropriate where one party will continue to run the business.