Divorce and the Family Business: How Business Assets Are Valued

When a marriage ends and one or both of the parties has a significant interest in a family business, the financial remedy proceedings can become considerably more complex. Establishing the true value of a business, and deciding how to treat it as part of the overall settlement, involves a number of important questions that require specialist advice from the outset.

Is the business a matrimonial asset

The starting point is whether the business is treated as a matrimonial asset. A business that was built up during the marriage, whether by one party or jointly, is generally treated as part of the matrimonial pot. A business that was established well before the marriage and where the non-owning spouse had no real involvement or financial stake in it may have a stronger claim to being treated differently, though in a long marriage even pre-marital business interests tend to lose their separate character over time.

The court looks at the full picture, including how the business was funded, what role each party played, and how the business's value relates to the other assets available in the case.

How a business is valued

Valuing a business is rarely as simple as looking at the company's bank balance. Different methods of valuation apply to different types of business, and the choice of method can make a significant difference to the figure arrived at. For professional practices, such as law firms or medical practices, an earnings-based approach is commonly used. For asset-rich businesses, a net asset value approach may be more appropriate.

In contested cases, both parties typically instruct their own expert valuers, or the court directs a single joint expert to carry out the valuation. The process of instructing a business valuer, providing the necessary financial information, and working through the report takes time and adds to the cost of the proceedings.

Our family law barristers can advise on the valuation process and what to expect at each stage.

Liquidity: can the business value be extracted

One of the central practical challenges with business assets is that they are often illiquid. The business may be worth a significant sum on paper, but the cash is tied up in the business rather than sitting in a bank account. This creates real difficulties when it comes to achieving a financial settlement.

Several approaches are available. The business-owning spouse can pay the other party from other assets, effectively offsetting the business value. The business can be sold, though this is often undesirable and commercially disruptive. Deferred payment arrangements can be structured, though these carry uncertainty about future enforceability. Alternatively, the non-owning spouse may retain an interest in the business for a period while the business-owning spouse raises the funds to buy them out.

Protecting the business during proceedings

While proceedings are ongoing, there may be concerns about one party taking steps that affect the value or profitability of the business. Courts can make orders restricting certain actions in relation to business assets where there is a genuine concern that assets might be dissipated or diminished. Getting advice at an early stage about what protections may be available is important if this is a concern.

The non-owning spouse's position

The spouse who does not own or run the business may feel that they have limited visibility into its true financial position. This is a legitimate concern, and the financial disclosure process is designed to ensure that complete and honest information about the business is provided. Company accounts, management accounts, and information about directors' remuneration must all be disclosed.

If there are concerns that the business's true value is being understated, a forensic accountant can be instructed to investigate. A barrister can advise on when this is likely to be necessary and how to frame any such request to the court.

You can read more about financial disclosure in our guide to completing Form E.

To discuss your next steps with a specialist barrister, reach out to our team today.