Natasha Kurth
- Partner
- Family & Divorce
Business valuations in divorce and financial remedy proceedings
Business ownership features in an increasing number of divorce cases, particularly as more couples hold shares in family companies, start‑ups or private equity‑backed ventures. At the same time, economic uncertainty continues to influence business performance and liquidity. Against this backdrop, the outcome of a business valuation can transform the financial landscape of a divorce case.
It is difficult to negotiate a fair financial settlement, or for a Judge to determine a fair outcome for financial division on divorce, without knowing what is in the “matrimonial pot”.
For this reason, business assets are often valued in divorce and financial remedy proceedings. Their value may be significant and it is usually difficult to quantify this value, without the assistance of an appropriate expert.
The court will normally require a business valuation to be undertaken by an independent forensic accountant, who is jointly instructed by the parties. This helps to ensure proportionately, transparency and confidence in the valuation process.
How are trading businesses usually valued?
The expert will typically consider the company’s earnings and attempt to capitalise this value:
- Step one: they will calculate the company’s maintainable earnings, usually by reference to its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). The expert will look at past profits, typically attributing greater significance to the most recent years of trading. They will also consider general trends in the company’s trading and future projections.
- Step two: the EBITDA is multiplied by an “earnings multiple” to provide the company’s “enterprise value”. The earnings multiple is decided by the expert, with reference to transaction and quoted company comparators.
- Step three: the enterprise value is adjusted in respect of the company’s net cash, debt, surplus assets and working capital. This provides the equity value.
- Step four: the equity value is adjusted to reflect the size of the shareholding. It may be appropriate to apply a discount for a minority shareholding. Furthermore, shares in a private limited company might be more difficult to sell and a “marketability discount” might also be appropriate.
- Step five: the capital gains tax arising on a disposal of the business interest will be considered (taking into account any reliefs available) to provide a net equity value.
What other methods are used to value a business?
The expert may consider a company’s net assets, discounted cash flow or dividend yield. Experts will sometimes use a variety of valuation methods to cross-check their findings.
How are business valuations affected by a turbulent market?
When looking at EBITDA, a company’s past performance may be less reliable as a predictor of what it is likely to earn going forwards. Future forecasts and earnings multiples may also be less reliable.
Market challenges may also impact on a company’s surplus cash, debt and liquidity. The company’s liquidity can be very important when looking at the option of extracting cash to fund a financial settlement.
For these reasons, careful consideration must be given to the parameters of the expert’s instructions and the disclosure that should be provided to the expert. For example, recent management accounts may be crucial in providing an up to date snapshot of performance. Choosing the right expert, with relevant experience, is also key. The Family Team at Wedlake Bell is experienced in dealing with these issues.
What if a business valuation is disputed?
The business valuation is subjective. For example, the maintainable earnings figure and appropriate earnings multiple are open to interpretation. Different experts will therefore arrive at different results.
Where the valuation is disputed, it is advisable to instruct a “shadow expert” to consider the original valuation and advise on points of concern or challenge. That information can be used to launch a Court application, requesting permission to adduce evidence from an additional business valuation expert. This is known as a Daniels v Walker application, after the case in which a ruling of this kind was first made.
How Wedlake Bell can help
The outcome of a business valuation can transform the financial landscape of a case.
The Family Team specialises in divorce and financial remedy cases involving complex business structures. For further information, please contact Natasha Kurth.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
Meet the team: