How to calculate how much a business is worth in a divorce
When you enter divorce proceedings, you will need to negotiate a deal with your spouse with respect to the ownership of assets, including how to divide a business owned by both parties. To calculate the value of your business and your portion of the shares, you will need to arrange a business valuation.
The company valuation process for divorce will involve looking at how much similar businesses sell for and how much a potential buyer would pay for the business if it was listed for sale. The valuation method will vary based on the business type and the share structure – whether one spouse holds a controlling interest or if there is a sole shareholder.
We provide an overview of how businesses are treated in a divorce, who can appoint a business valuer and how the business is valued in a divorce.
How is a business treated in a divorce?
If both spouses in a divorce are joint owners of a business, the whole business will need to be professionally valued to calculate its monetary value. In some cases, the financial settlement may be navigated by the divorce terms in a shareholder agreement, or the court may make the final decision if an out-of-court settlement cannot be reached.
Why is a business valuation important in a divorce?
Upon divorce, your financial association with your spouse will end and make way for a financial settlement which will include dividing the business. To calculate the accurate worth of your shares and receive fair payment, you will need to arrange a valuation of your business.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Who will arrange a business valuation in a divorce?
If you are going through a divorce, then the Valuer’s duty of care will be to the court, rather than to the parties and in such case it is important that a joint instruction is made. Normally, your solicitor will communicate with your spouse’s solicitors to decide upon a valuer and they will then issue a joint letter of instruction. It is important that you provide an input to your solicitor as to the Valuer you would prefer to use and in any event, you must instruct them to insist that whichever valuer is ultimately appointed is actively involved, day to day in the sale of businesses as a going concern. If an accountant/Valuer is appointed that does not have such experience it is highly unlikely that they will have access to the comparable evidence that is required to provide you with an accurate valuation, based upon what businesses like yours are actually selling for on the open market and they may inadvertently provide a valuation that ultimately could prove very costly to the parties involved.
If you were to instruct us (or any Valuer) directly without the written authority of the other party, then such a report would not be relied upon by the court and indeed there would then be a conflict of interest preventing the same valuer from providing a valuation for the court, (see Disputing a business valuation below which applies where one party has appointed a valuer to act on their behalf).
How is a business valued in a divorce?
To value a business in a divorce, you will need to appoint a business valuer, or a business broker, also known as a business transfer agent, that offers divorce valuation services. The methods used to value a business in a divorce may vary, such as:
- Similar sales – How much do similar businesses sell for? A business broker or business transfer agent will have access to banks of comparable data on past sales which can be refined to mirror an identical business
- Asset valuation – How much are company assets worth? This route is suitable for asset-rich businesses
We run through more common valuation methods here that include the price-to-earnings ratio (P/E) route and entry cost.
Disputing a business valuation in a divorce
A spouse may dispute the valuation of a business in a divorce if they suspect that the business is worth more or if they do not trust the business valuer. Common reasons why a spouse may dispute a business valuation include:
- Undervaluation: if the business valuation generates a lower value than the business is worth, the spouse may lose trust in the business valuer.
In some cases, exiting business partners inflate financial reports in the run-up to a divorce, such as the number of sales or profit, which could raise a dispute between both parties.
- Biased advice: your spouse may suspect that the business valuer is subjective if the decision to appoint them was made without their input or the business is undervalued or overvalued.
As such, it is essential to appoint a reputable and trusted business valuer with a proven track record in divorce valuations.
- Business health: if your business took a financial hit during the pandemic, and income is yet to return to pre-Covid-19 levels, this may likely drive down the value of your business which may come as a surprise to both parties.
To avoid disputes and protect the future of the business, both parties should collectively decide on a business valuer to value the business, subject to circumstance. This can save time and money in the long run as the alternative is a court dispute which can be expensive, or dispute resolution.
If the dispute reaches the court, a single point expert may be invited to provide a final impartial say on the subject.
Divorce valuation services
At Selling My Business, our expert team of business valuers provide divorce valuation services for a fee. Founded in 1956, we have over 60 years of experience in valuing businesses in a divorce or partnership split. We can advise you on how to value a business, valuation methods and support valuation disputes.