Company Valuations and Divorce: Navigating Asset Division with Care

Divorce can be a challenging emotional journey, but when a business is part of the marital assets, the complexities multiply. For couples who own a company—whether it’s a small business, a partnership, or a corporation—accurately valuing that business is crucial for a fair division of assets. This blog explores the intricacies of company valuations during divorce proceedings and offers insights into navigating this often tumultuous process.

Understanding Company Valuations in Divorce

When a couple separates, all marital assets will need to be evaluated, and that includes any businesses. A proper valuation is essential because it determines how the business will be treated in the divorce settlement. Failing to accurately assess the value of a business can lead to significant financial inequities.

Why Valuation Matters

The way a business is valued can profoundly affect both parties. An inflated valuation can lead to one party receiving an unfairly high share of the assets, while undervaluing can cost the business-owning spouse significantly. Understanding the true worth of the company ensures both parties can negotiate from a position of knowledge, reducing the chances of disputes.

Methods of Company Valuation

Unless the lawyers representing a divorcing couple specify how the business should be appraised, the valuation is typically based on market value. The conventional legal definition of ‘market’ value is the price agreed upon by a willing buyer and a willing seller. However, there are rare instances where this method may not be suitable.

The market value of a business, whether in the context of divorce or not, can be assessed through various methodologies. In divorce situations, the two most prevalent methods are the net asset-based approach and the capitalised earnings method, which involves calculating profit, applying an appropriate multiple, and adjusting for any debts and surplus cash.

In certain situations, alternative methods might be more fitting. For example, if the business deals in capital-intensive products or has consistent revenue streams, the discounted cash flow (DCF) method could be more effective, as it allows for accurate forecasting of cash inflows. For businesses primarily engaged in investments—such as real estate or stock portfolios—valuation experts might need to consult property advisors or investment managers for accurate value assessments.

Ultimately, the most suitable valuation methodology is often determined by examining the business’s operations and model. The timing of the valuation is also crucial; there are instances where a valuer may be requested to provide value estimates at multiple points in time, which can influence both the valuation approach and the final results.

The Impact on Asset Division

The outcome of the company valuation can significantly influence the asset division process. If one spouse owns a business that has substantial value, the other spouse may seek a larger share of other assets to balance the settlement. Additionally, if both spouses are involved in the business, considerations for operational rights and management roles may also come into play.

Seeking Professional Assistance

Given the importance of accurate valuations and the potential for disputes, it is often advisable to enlist the help of professionals, such as:

– Business Valuators: These experts can provide a comprehensive and unbiased valuation of the business, giving both parties a clear understanding of its worth.

  – Divorce lawyers: A solicitor with experience in business valuations can guide you through the legal implications and help negotiate a fair settlement.

  – Financial Advisors: They can assist in structuring the settlement in a way that protects your financial future.

Recent case law

In the recently decided case of WW v XX [2024] EWFC 330 the parties separated after a marriage lasting around five years. The husband was a dual citizen in the UK and another country. He was running his own highly successful business in the overseas country (owning 100% of the shares since 2004). The company also had a UK subsidiary. The husband purchased the subsidiary in 2010, prior to the parties’ cohabitation.

In the course of proceedings, a dispute around the valuation of the company could not be settled, and the court had to determine its valuation and the extent to which it amounted to a matrimonial asset. While two highly experienced experts agreed that the husband’s shareholding was valued at £2,403,571, they did not agree on the multiplier for calculating an earnings basis valuation figure. The two figures they arrived were £15,645 and £10,375.

Hess HHJ noted that experts often disagree which business sector was the most reliable indicator of multiplier selection. He decided to take a mid-way final figure of £9,976,792 (which included an additional £1,891,429 real property uplift).

The question was then raised as to whether the company formed part of matrimonial property. The judge decided that even though the husband had fully owned the company since 2004 (a characteristic of non-matrimonial property), it had undergone valuable and non-passive growth since 2010. Therefore it had partly acquired matrimonial asset status.

The experts had been able to agree that the September 2010 pre-tax value of the shares was £1.25m – so how should that be updated fairly? 

The judge agreed that the purchase of the UK subsidiary amounted to a ‘springboard event’ moving the company to a different level.

The purchase increased the experts’ 2010 figure to £3,850,000 (tax from country A was to be deducted from this). The net figure was £2,772,000. Therefore, the non-matrimonial portion of the company was £7,204,792 (£9,976,792 minus £2,772,000).

Final orders were made reflecting a 38:62 split in H’s favour. 

Conclusion

Divorce brings with it numerous challenges, but understanding the process of company valuations can help couples navigate the complexities of asset division more effectively. By ensuring a thorough and fair assessment of any businesses involved, both parties can work towards a resolution that reflects their contributions and investments, leading to a more equitable outcome. If you’re facing a divorce and business ownership, consulting with experts may be your best move towards a smooth transition.

This blog was prepared by Alexander JLO’s senior partner, Peter Johnson on the 8th March 2025 and is correct at the time of publication. With decades of experience in almost all areas of law Peter is happy to assist with any legal issue that you have. He is widely regarded as one of London’s leading divorce lawyers. His profile on the independent Review Solicitor website can be found Here 

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