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Wednesday, July 17, 2024

How are businesses dealt with in divorce?

How businesses are dealt with in divorce, is one of the most questions asked of Jane Tenquist, head of family law team at Myerson Solicitors. Jane (pictured) explains more on the topic here:

The value of a business and the income derived from it will be taken into account and potentially divided by the court on divorce. However, this doesn’t necessarily mean that the court will order the sale of the business.

The family court understands that the business provides an essential income and losing it could have severe consequences. In family court proceedings, a forensic accountant, jointly appointed by each spouse’s family law solicitors, typically determines a business’s value.

They assess:
* The post-tax value of the business
* The available cash in the business and the tax implications of extracting it
* The current and future earning potential from the business

The court will consider the market value of a shareholding in a business, aiming to determine what a willing buyer would pay a willing seller.

When to value a business

Businesses are valued if one or both spouses have an interest in the business. They can be significant income sources or valuable capital assets.

How to value a business in divorce?

Forensic accountants use several methods to value a business:

Capitalised Future Maintainable Earnings Method

This method is applied to majority shareholdings. It estimates sustainable earnings, including turnover and earnings before interest, tax, depreciation, and amortisation (EBITDA).

This sum is multiplied by a factor representing future years’ earnings referred to as the price/earnings ratio. This ratio is derived from comparable businesses with known market values, expected investor returns, and a multiple of representative earnings. Adjustments account for unusual transactions and market fluctuations.

Net Assets Method

This method values a company based on the realisable value of its net assets minus liabilities. Adjustments include considerations for goodwill and potential unrecorded liabilities like deferred tax on property sales or loan facility break fees. It’s typically used when valuing companies owning property portfolios.

Dividend Yield Method

This method is primarily used for minority shareholdings and rarely for private companies. It values a company based on the income it generates for its owners.

How is a business split in a divorce?

The court has broad discretion in dealing with business assets in divorce and can
order:
1. Transfer of shares
2. Company buyback of shares
3. Lump sum payment to the non-business-owning spouse from business funds
4. Allocation of other liquid marital assets to the non-business-owning spouse
5. Sale of the business
6. Spousal periodical payments

Is a discount applied to the value of a business in divorce?

A business value can fluctuate with economic and market conditions. The court acknowledges that business assets are less secure than easily quantifiable assets like property sale proceeds.

However, a discount is not guaranteed as any valuation by a forensic accountant typically accounts for business risks.

Occasionally, a discount may be applied if one spouse receives more liquid assets. Generally, the court aims to balance riskier assets against more secure ones to ensure both spouses share a proportionate risk.

For more information and guidance on how businesses are dealt with during divorce
contact the Divorce Lawyers at Myerson Solicitors.

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