Valuing the matrimonial portion of a business

There are various approaches which the court may take regarding the valuation of a business. From this, there has been notable debate as to the correct approach to determine the matrimonial and the non-matrimonial portions of a business. In particular, two distinct approaches have emerged: 

1. A ‘springboard’ approach 

2. A ‘straight line’ apportionment approach 

Springboard approach  

Springboard refers to reflecting in the valuation what the potential value of a business was pre-marriage.  It is an acknowledgement of the fact that the value had, or even still has, the potential to increase significantly. 

The recognition of latent potential or ‘springboard’ reflects that an increase in the market value of a business during a marriage, may not always be matrimonial. The increase can be attributed to the potential of the business which was realised during the marriage but set in motion prior to it, through the efforts of the relevant party.  

In Jones v Jones [2011] EWCA Civ 41, the court held that the latent potential of the husband’s business at the start of the marriage should be considered a “springboard” in its value. The expert valuation of £2m was therefore doubled to reflect this, in a manner which the court recognised was arbitrary, rather than based on a mathematical approach. This was then increased to £9m to reflect the passive growth of the business, which was determined through reference to the relevant FTSE index. As such, the court valued the company at the start of the marriage at £9m, rather than £2m. Therefore, the portion of the business which was deemed matrimonial was decreased. This approach has also been referred to as the ‘formulaic approach’. 

The Jones approach was similarly adopted in IX v IY [2018] EWGC 3053 (Fam). The husband submitted that the valuation of his business at the start of the marriage should include its springboard potential and be subject to a form of indexation to reflect the business’ growth from the momentum caused by his “heavy lifting” in its development. Looking at this “heavy lifting” excluded the husband’s contributions to the business following the marriage, which were matched by the wife’s other contributions in the relationship and added value to the matrimonial portion of the business. The court recognised both the considerable latent potential of the business at the start of the marriage, as well as the difficulty in valuing this potential. Nevertheless, this latent potential or ‘springboard’ and passive growth was taken into account. Thus, the matrimonial portion of the business was reduced. Adopting what the judge deemed “the non-formulaic approach”, he determined that 40% of the business was non-matrimonial.  

straight line apportionment approach

The ‘straight line’ apportionment approach was adopted by Mostyn J in WM v HM [2017] EWFC 25. This approach plots the value of a business at the time it was incorporated on one end of a graph, and its value at the date of the final hearing at the other. A straight line is then drawn between the two points.  

Mostyn J justified this approach by his assertion that it “resonates with fairness” by more accurately representing the “true latency of the business at the time that the marital partnership was formed”. To emphasise this view, he posed the question: 

“The linear approach is the evaluation which I make in this case. It resonates with fairness. It reflects my opinion of the true latency of the business at the time that the marital partnership was formed, and that, intrinsically, value is (at least) as much a function of time as it is of work or market forces. In argument, I asked "how could it be said that a day’s work in 1980 in creating this company was less valuable than a day’s work last week?" In my judgment, the answer is that it could not.” 

When the case was appealed in Martin v Martin [2018] EWCA Civ 2866, Moylan LJ held that Mostyn J had not been wrong to adopt this approach.  

which approach is correct?

In Jones, Arden LJ rejected the straight-line approach in her minority judgment, arguing that the court should “look at what has actually happened and not at what might have happened”. Yet this approach is still used, even if only as a cross-check rather than the court’s starting point.  For example, Mostyn J utilised this approach again more recently in A v M [2021] EWFC 89. In IR v OR [2022] EWFC 20, the court decline to adopt the method given its unsuitability on the specific facts of the case, but its usefulness was recognised in cases where one party has founded a business prior to marriage,  

Similarly, whilst the Jones approach is not adopted frequently, it was applied recently in CO v YZ [2020] EWFC 62. However, the judge did note that it may have been simpler to adopt the straight-line approach, had he not already instructed a historic valuation to be determined by a single joint expert. 

Ultimately, both approaches are available, and the court will choose its own methodology based on the specific circumstances of the case before it. Each approach has its own merits, and the court is not bound to choose one over the other. This idea was helpfully expressed by Holman J in Robertson v Robertson [2016] EWHC 613 (Fam), who held that “methodology is a tool and not a rule”. Further clarity on this issue can also be sought from Moylan LJ’s observation in Martin: 

“a judge has an obligation to ensure that the method he or she selects to determine this issue leads to an award which, to quote Lord Nicholls in Miller; McFarlane, at [27], the judge considers gives “to the contribution made by one party’s non-matrimonial property the weight he considers just … with such generality or particularity as he considers appropriate in the circumstances of the case”. 

…… the exercise on which the court is engaged is not restricted to a single route to determining how the wealth is to be characterised for the purposes of the application of the sharing principle. The judge was not bound to adopt the approach adopted in Jones v Jones just as he was not bound to adopt the approach taken in Robertson v Robertson.” (emphasis added) 

In financial remedy proceedings, obtaining an accurate valuation of both parties’ business interests is key. If you are considering or going through a divorce, and either you or your spouse have a business or business interest, contact Vardags today for a free initial consultation with one of our specialist divorce solicitors.  

BOOK FREE CONSULTATION