Unless your divorce is amicable it’s likely you and your ex will disagree about some aspects of dividing your finances. But working out how much a business is worth can be especially challenging. Find out what’s involved.
Divorce lawyers say that couples can spend a lot of money valuing a business and have no idea at the start of the process whether or not it’s a worthwhile exercise. So how can you protect your financial position without wasting money?
The challenges of valuing a business
One of the problems about valuing a business, especially if only one partner owns it, is that it’s hard to know whether the figure they say their business is worth is accurate. Business owners are usually optimists – they have to be otherwise they wouldn’t work for themselves. The problem is that this can give a misleading picture of how successful they are and how much their business is worth. It can mean that their partner believes the business is worth a fortune when in fact it’s only ticking along – or worse.
SAVVY TIP: Valuing a business can be challenging, and if there’s a recession on many businesses are suffering. If there’s one partner who’s not been involved in the business he or she may find it very difficult to accept that the fortunes of a business may have changed immensely, but it needn’t take much for its profits to be hit dramatically.
How can a business be valued?
A business can be valued in several ways:
1. Earnings Basis: Most profitable businesses would be valued this way. Essentially, it looks at the profit stream that a company could generate in the future and multiplies that figure to determine a value. The multiple figure is chosen by the accountant (or whoever is valuing the business) by bench-marking the firm to similar quoted and private companies.
2. Assets basis: This is useful where profits are erratic or non-existent or for certain types of business, such as property investment, where the value of the company will be closely linked to the value of the assets it owns. Here, an accountant would look at what the company would be worth if the assets were sold in the ordinary course of business as a going concern.
3. Dividend basis: If your ex has a minority shareholding in a company (i.e. below 50%), you may get a more accurate estimate of its worth using a dividend basis valuation. For example, you might have an established family business paying a dividend of £10,000 a year, which could be worth more than the underlying assets the business owns.
SAVVY TIP: In Scotland, only the value of a business during the marriage is relevant to the financial settlement.
Getting a valuation
If your ex owns a business your lawyer would be likely to advise you to get it valued independently – or at least to ask an expert to look at the company’s books to see if it’s worth further investigation. David Allison of divorce lawyers Family Law in Partnership, says it’s often worth getting a forensic accountant involved. “Rather than getting a straightforward valuation, which can be of limited use, a forensic accountant may be able to advise on how the business could be restructured to fund the divorce – while still letting it have a viable future.”
Pros of involving a forensic accountant:
- It can help you decide what to do. If you get a forensic accountant to have a look at the company’s books, it should help you decide whether or not to go ahead and spend money on a full valuation.
SAVVY TIP: Be aware that a full valuation and report into a business can cost thousands of pounds (£10,000 – £15,000 is not unusual in complicated cases), although a basic valuation can cost just a few hundred pounds. And there’s no guarantee of what you’ll find.
Cons of involving a forensic accountant:
- You can duplicate spending. If you decide to go ahead and hire a forensic accountant to carry out a full valuation of the business, you can’t use the same one who prepared the informal report.
The role of the single joint expert
If you’re getting divorced in England or Wales, it’s unlikely that you and your ex will each appoint an expert to carry out a valuation, instead a so-called ‘single joint expert’ is normally used. It’s his or her duty to give the court (rather than you or your husband) an accurate valuation of the business in question. However, even though you share an expert each of you can hire your own accountant to tell you (or your lawyer) what questions to ask.
SAVVY TIP: In some circumstances it may be possible for each of you to appoint your own specialist (called a party expert), rather than relying on a single joint expert. Often it’s down to the judge as to whether he or she will accept each side using their own forensic accountant.
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