Businesses often form part of the assets to be shared on divorce, and can therefore comprise a central element of financial proceedings. It is likely that the court will ask that any business or business interests are valued as part of the financial disclosure exercise.
Indeed, in recent years, increasingly complex matrimonial cases have placed new and more frequent demands on accountancy experts (instructed either as single joint experts or as sole experts through solicitors).
Charman v Charman emphasised the growing requirement for matrimonial valuations to be more commercial, more specialist and less hypothetical. This is further supported by Charles J in D v D , who argues that a business approach rather than a family law approach should be used when looking at the value of businesses in financial proceedings following the breakdown of a marriage.
There are several methods to valuing a business accepted by the court. The method chosen seems to depend on the type of business being valued. Indeed, there is no correct method of valuing business interests, although there are preferred industry and sector-led valuation methods, depending on the nature and constitution of the business.
When a company has many differing trading activities, it may be most appropriate to value the company using a hybrid of the methods available. The following are the most commonly-used methods to value private companies in financial remedy proceedings:
Net asset valuation
Net asset valuation is most frequently used for valuing property investment companies, investment trusts and certain financial institutions, and is extremely useful when valuing an entire company. If the company is in financial difficulty, the breakup value is considered. This constitutes the value after the assets of the company are sold independently and all the company debts are settled. When assessing the valuation, accountants look at key considerations, such as: are there any intangible fixed assets? What is the nature of the stock? Will there be difficulties in recovering debt? Does the business own freehold property? Are they shown at market value on the accounts?
Earnings basis valuation
Earnings basis valuation is the most common method for valuing an on-going trading company. The earnings used to start the valuation are often the turnover, EBITDA (earnings before interest, taxes, depreciation and amortization) or profit after tax. The value is obtained by identifying a level of earnings which represents the business, comparing earnings with similar businesses that have a known market value, an investor’s required return, and/or applying a multiple of the representative earnings.
Valuation based on dividend yield
This method is commonly used to value a small shareholding in a business, where the shareholder has limited control rather than owning the whole business. The return an investor would make is based on the dividends, capitalised at a required yield. The dividend pattern must therefore be identifiable and must form a constant stream.
There are, in addition, considerable discounts available which can reduce the total figure of a valuation of a business. For example, the court may apply a discount for lack of marketability or a discount for lack of control. When looking at assets acquired before the marriage, adjustments may be made to reflect a springboard (the inherent potential of a company at the date of the marriage, which anticipates a substantial increase in its value in future years) or the passive economic growth of a company between the date of the marriage and the date of the sale (growth which cannot be attributed to active steps taken by either of the parties during the marriage).
Other, more controversial, discounts include the CEO selling discount and Key Man risk -where the court will consider the extent to which the company and its future profitability are dependent on one individual.
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