Relationship Breakdown And The Family Business: Understanding The Valuation Process

Relationship Breakdown And The Family Business: Understanding The Valuation Process

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The nature of relationship breakdowns means that they will always herald a difficult time for all involved. After spending months or years with another person, your lives can be almost inextricably entwined, yet division is inevitable: of yourselves, your assets, and perhaps even your business.

This is a source of real worry for many entrepreneurs, especially those who have devoted their time, talents, and capital to building a successful venture and now worry that it will be ripped away from them. If you’re afraid of how your business will be affected, here’s a little more information to hopefully help set your mind at rest…

A 50/50 Split? 

For those who have created a competitive company, it can seem really unfair to think that your spouse could take 50 per cent of what you’ve built now that your relationship has broken down, but it’s probably the case that you’re fretting more than you need to.

In reality, it’s highly unlikely that your husband or wife will be awarded a direct interest in your business. The chances are that the court will allow you to retain full ownership, choosing to compensate your spouse with other assets instead.

Nor are they likely to force a sale of your venture. Although this can happen, it’s very rare, and usually in the best interests of both parties to retain such a valuable source of financial support moving forwards into the future.

Similarly, your spouse owning shares in the business is unlikely to translate to the court transferring ownership to them.

The Valuation Process 

Although you’re unlikely to lose the family business as the result of a relationship breakdown, your spouse’s needs must still be taken into account, and in order to calculate what he or she is entitled to, a valuation will take place. Several methods may be used to reach this figure, and these are worth having a basic understanding of if you hope to shape the result in your favour. They include:

  • Earnings based valuations: Earnings based valuations focus on the potential future earnings of the business in order to calculate how much it is worth and what your spouse will be entitled to from the marriage settlement. 
  • Dividend based valuations: This form of valuation is most often used when one party possesses a minority shareholding. It looks at the potential future dividend payments of the company in question in order to examine spousal entitlement. 

  • Discounted cash flow: Alternatively, a discounted cash flow method may be used. This assesses the cash flow forecasts for a well-established, profitable enterprise for a set number of years, whilst also taking into account a residual business value. 
  • Asset based valuation: The courts will also have the option to order an asset based valuation, which will calculate the value of the business’ accounts without exploring its future earning potential. 

The evidence of these findings will be used by the courts to reach a settlement that is believed to be as fair as possible to both parties.

Should you seek further information or advice on how the process works and how best to reach an agreement that benefits you, get in touch with a specialist lawyer like Withers Worldwide today to see how they can help.