If a couple divorce, all the assets that they have an interest in jointly, on their own or with third parties, are considered relevant. In light of this many business owners worry about the value that will be attached to their business interests if they divorce.

Businesses come in all shapes and sizes. Some are small businesses that have very limited assets and are just an individual working on a self-employed basis, either as a sole trader or through a limited company. For example – an IT consultant who works through a limited company. Usually few assets are owned by these companies, often just a small amount of office equipment. It is unlikely that this type of business will have a value of any significance, as the business is just a vehicle through which that person earns an income. If you take that person away the business has no value.

Other types of businesses are likely to have a value and will need to be valued within the divorce proceedings unless a value can be agreed by the divorcing couple.

If a business valuation is needed in divorce proceedings it is usual for the couple to jointly instruct an accountant, who is an expert in business valuations, to prepare a valuation report. The expert is considered to be independent and is providing a valuation for the court. It is unusual for each spouse to obtain their own business valuation in divorce proceedings.

Valuing a business is an art and not a science, so different accountants will attribute different values to the same business. Some accountants are more conservative than others with their valuations. It is therefore important that you take advice upon the right accountant to instruct before going down the valuation route.

Most businesses are valued in one of two ways. 1. On a net asset basis. 2. On an earnings basis.

Net Asset Basis

Businesses that have significant assets, such as properties, are usually valued on a net asset basis. This is the value of all the assets owned by the business less all of the debts. Where the business owns assets such properties, it may be necessary to get up to date valuations of these before the accountant can prepare their report.

Earnings Basis

This method is usually appropriate where a business is trading and generating a profit from that trade. Typically, this method requires the assessment of the likely level of Future Maintainable Earnings and the application of an appropriate multiplier. To do this recent trading performance is considered – usually over the last three years.

The accountant will usually undertake both calculations and use the highest figure. Therefore, a trading company could be valued on a net asset basis if its assets have a high value or alternatively if the recent trading performance has been poor, and therefore the Future Maintainable Earnings are found to be low.

Once the accountant has valued the business, they must also consider the tax that would be payable by the business owner if their interest in the business were sold. This is because the divorce court looks at the net value of the spouse’s business interests.

If the spouse does not own the whole business, the accountant should consider whether the spouse’s interest should be valued on a pro-rata basis or whether a further discount should be applied. Often a discount is applied if the spouse has a minority interest in a business.

It is all very well valuing a spouse’s interest in a business, but a business may not be able to pay out significant sums of money to assist fund a divorce settlement, even if the spouse’s interest has a significant value. The accountant therefore also needs to look at liquidity when they prepare their report. This is the amount of money that can be taken out of the business, without impacting its ability to function as a business. The tax consequences of taking this money out of the business must also be considered.

Another factor that will be considered by an accountant when valuing a business owned by more than one person, is any Shareholders Agreement that they have and what it says, if anything, about how shares in the business should be valued if one of the shareholders wants to leave the business rather than the whole business being sold. A Shareholders Agreement can have a significant impact on the value of a divorcing spouse’s shares in a company.