Undertaking a business valuation in divorce

Understanding how business assets are valued in divorce is key to ensuring a fair financial outcome – especially when ownership, liquidity and control are complex or disputed.

Before assets can be fairly distributed within financial remedy proceedings, both parties and the court need to understand the value of all their assets, including any business interests. This forms part of the computation process.

As part of this process, the parties must consider whether it is necessary to instruct a specialist expert to value the shares either party holds in any business. If there is a dispute over whether a formal valuation is required, the party seeking the valuation may need to make an application to the court, so it can consider the merits of such an instruction.

If the parties agree, or the court determines, that a valuation is needed, it will be conducted on the basis of a joint instruction. The expert must be impartial to both parties. Any order for a valuation, or agreement between the parties, must address the identity of the chosen expert and the scope of their instructions.

The purpose of a business valuation is to assist the court in testing the fairness of the proposed outcome for how the assets should be split.

In Miller v Miller; McFarlane v McFarlance, [2006] 1FLR 1186, Lord Nicholls described business valuations as “often a matter of opinion on which experts differ.”

As such, the court typically engages in a broad analysis rather than a detailed accounting exercise when valuing a business in divorce.

Key considerations

In HO v TL [2023] EWFC 215, Peel J summarised the legal principles the court should consider when valuing a business in financial remedy proceedings:

1. It is for the court to determine the value of the business, not an expert.
2. Valuations of private companies can be fragile and uncertain. Valuing private companies is extremely difficult.
3. The reliability of the valuation depends on several factors:
   1. Whether there are any business comparables
   2. How niche the business is
   3. The appropriate basis of the valuation (eg net asset, EBITDA, discounted cash flow)
   4. The extent of the parties’ interests and their level of control, and the extent of third-party interest
   5. The relevance of any shareholders’ agreements
   6. Whether there is a realistic market for sale
   7. The volatility of the figures
   8. The reliability of forecasts
   9. Whether the assumptions underpinning the valuation are seriously in dispute.
4. In practice, the court has the following options:
   1. Fix a value for the business
   2. Order the business to be sold
   3. Divide the asset in specie – transfer the asset from one party in the same form, rather than converting into cash (known as “Wells” sharing).
5. Whether a business should be retained by one party, sold or divided in specie depends on the facts of each case. The court will consider:
   1. Whether the business was founded before the marriage, during the marriage or pre-owned
   2. Whether both parties were involved in its strategy and operation
   3. The ownership structure of the business
   4. Whether dividing the asset in specie is practical or possible, given it will mean the parties are tied to one another post-divorce
   5. How to ensure fair allocation of resources.
6. There is a difference between copper-bottomed assets (high liquidity, low risk) and illiquid/risk-laden assets (low liquidity, higher risk).
7. When reflecting illiquidity or risk in a private company, the court has three options:
   1. The business valuation may incorporate an accountancy discount for factors such as loss of control, lack of marketability and lack of risk
   2. Allocate resources to reflect illiquidity and risk. This would be to allocate the party retaining the business a greater share of the overall assets to provide a fair balance. It would be for the court to determine whether, and to what extent, to apply this “court discount”
   3. In some cases, the court might take the valuation which includes the accountancy discount and apply a further court discount (a combination of the above).

Valuing business assets is a delicate and complex area of the law. Specialist legal advice should be sought by business owners going through a divorce to protect their business and ensure a fair outcome for all.