Divorce business valuations, when lifestyle clouds reality

Divorce business valuations can be a contentious area that often requires expert help, justifiably so, is in determining the value of the family business

In divorce business valuations where one party owns shares they will typically seek to present a low valuation for those shares. Thereby reducing their share of the marital assets. The most common ways of understating a company’s value are to:

  • quote the net asset value shown in the latest financial statements. (A trading company typically has a value in excess of the net asset value); or
  • quote a nil business value based on recent losses or low profits.

In many cases a divorce business valuation can be hugely understated for a number of reasons which I won’t look to cover here. In some cases, albeit rarely, the true value can be in line with that stated but as the parties have been enjoying a good standard of living or funding extravagant lifestyles the party with no involvement in the business believes there is something being hidden.

I regularly see cases where the spouse to a business owner has little knowledge of how the business performs but enjoys the benefits that appear to flow from the business. The performance of the business is never questioned while things are going well but when the relationship breaks down an expectations gap can suddenly appear when Form E discloses a minimal share valuation.

Issues can arise when individuals fail to separate their income and cash from that of the business or become accustomed to a certain level of income in good times and fail to adjust this in harder times.

Drawings or loans

I’ve seen cases where businesses have taken out loans that are subsequently used by directors for personal expenditure or drawings. The shareholder-director receives a regular, sizeable, cash income from the business. However, this income does not belong to the individual but represents drawings against a director’s loan account, sometimes in excess of what can realistically be repaid. The company, meanwhile, has a financial obligation to repay bank debt and incurs interest charges, both draining cash.

Excessive remuneration

Another example is where a business is experiencing difficult trading conditions but the director’s salary continues at levels previously paid in better times. The impact of the high salary is that the profitability of the business is lower, cash resources are depleted and the business faces financial difficulties in repaying creditors or funding future development.

As forensic accountants we can help to establish the true value of the business and clarify the underlying structure. In instances where there is disagreement over value, whether due to an expectations gap or attempted deception, we can provide a range of advice from a high level review of the proposed valuation to a formal expert report. In many cases simply removing the uncertainty helps the parties to move forward and achieve a swift resolution.

For more information

For more information on our divorce business valuations service, please contact either:
Kate Hart, or call us on:

01483 416232