Valuing a privately owned business on divorce

Valuing a privately owned business on divorce

During a divorce, your solicitor will seek to achieve a fair financial settlement on your behalf. Where you or your spouse is a shareholder in a privately owned business it will be necessary to value the business in order to achieve that “fair” settlement.

The court will want to know the level of income the company could generate, and what the shareholding is worth.

In order to resolve the financial issues, you and your spouse will need to provide a statement of your financial position. At a preliminary hearing the judge will consider the need for a valuation of the business. If you cannot agree a figure between you, the court may require a valuation from an independent accountant. The accountant will need to be given access to all the information necessary to complete a valuation of the company, or a party’s interest in it, and will answer specific questions asked of them. The method of valuing the business is usually left to the accountant.

There are four main methods of valuing a private company. The first is an earnings based valuation, which examines the future earnings potential of the company. This is the most common valuation approach when valuing an entire company. A price/earnings ratio is applied to an assessment of the maintainable earnings of the company and the accountant will look at comparable companies and ongoing deals with other companies to achieve this. A discount is usually given to minority shareholdings which can often be difficult to realise.

The second method is a dividend based valuation, which looks at the expected future dividends of the company. This method is appropriate for valuing small minority interests although dividends are often difficult to predict.

The third method is the discounted cashflow based valuation. This looks at the company’s anticipated cashflow well into the future and then applies an appropriate discount rate. This method is used when valuing a company in its entirety and when the company’s future cashflow can be estimated with reasonable accuracy.

The fourth basis of a valuation is an asset based valuation. This is particularly appropriate where the value of the company is largely in its fixed assets, such as a farm. This may need the additional input of a surveyor to value the assets and assess their income potential.

If you or your spouse have an interest in a company and you are contemplating, or going through, divorce proceedings it is important that you appoint an experienced solicitor.

Please talk to our Rajan Berry who can advise you as to the best way forward.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.