By Demelza Wrigley
If one or both of the parties to a marriage, and subsequent divorce, own a business, this is a financial resource which the court will take into account when determining the overall division of the assets under section 25 of the Matrimonial Causes Act 1973.
There is a common misconception that shares could be transferred into a non-owning party’s name, whereas a court cannot order this. Instead, the money’s worth of the shares will be considered, however a non-owning party does not have a right to be involved in the running of a business.
As can be appreciated, valuing shares in a private company is not an easy task, as the shares are often only worth what someone will pay for them, rather than being traded on the Stock Exchange. An accountant’s early involvement is therefore essential.
The court has two functions in cases involving businesses:
- To establish the value of the parties’ interests in the business.
- To decide how that value should be reflected in the final distribution.
Consideration also needs to be given to how the business may be treated as part of the distribution of the assets.
The court will want to ensure that the parties share proportionately in the liquid and non-cash assets, and that one spouse is not bearing more of the ‘risk-laden’ assets than appropriate.
The court may consider applying discounts to account for the levels of risk or, for example, when considering minority shareholdings. Of course, there may also need to be a transfer of shareholdings between the parties.
There are several methods an expert may use to value a business including net assets’ valuations, earnings’ valuations (used for valuing an ongoing trading company), discounted cash flow basis, dividend yield basis, industry practice and by valuing individual shareholdings.
Consideration will need to be given on the best method of valuation, and expert advice is often required to consider this. Up to date business valuations will always be required and should present a fair market value. Valuations will often be treated as a guide rather than scientific absolutes.
The court may also want to consider whether the business is matrimonial or non-matrimonial property, for example where a business interest may have been established prior to the marriage, inherited by one of the parties or has grown significantly post-separation because of the particular efforts of one party.
When dealing with business assets on divorce, we will always involve our corporate and commercial department at the earliest point to consider whether the proposed arrangements for the company are workable and also consider potential tax implications with the assistance of an accountant.
It is vital that early advice is taken to prevent deals being put forward by either side which are ultimately unworkable; this saves time in the long run and is cheaper for the client.
Demelza Wrigley is a specialist in divorce and a Partner at Bell & Buxton Solicitors. She is available
on 0114 249 5969 or email@example.com