Written by Hannah Boddy, Solicitor at Manders Law
We all know someone who knows the price of everything and the value of nothing. That can be very dangerous in the context of divorce proceedings. So, it’s time for a reality check – it is essential to understand the true value of a business in the context of divorce proceedings before embarking on costly litigation.
Read on for our Top Tips and practical guidance.
If a business features in your situation we also recommend you read our recent article, Love, Loss and Legacy: Dividing a Family Business on Divorce where we highlight potential options and the issues that can arise on dividing a family business, following a relationship breakdown.
What Does “Current Value” Really Mean?
Unlike splitting a bank account, business valuations involve a mix of financial analysis, expert judgment, and even a bit of subjectivity. In a recent case the process was described by a judge as “more art than science”.
Businesses can be dynamic, with fluctuating incomes, changing assets, and intangible factors like brand reputation and goodwill. That’s why determining an accurate value requires more than just crunching numbers; it demands expert judgment and a commercial understanding of value.
If you own a family business, you may wonder: “How do we put a fair price on something I’ve built over years?” Courts aim for a valuation that reflects the company’s real worth at the time of the divorce, considering factors like profitability, assets, and market trends.
The Role of a Single Joint Expert (SJE)
If a valuation is required, the first step should be to apply to appoint a Single Joint Expert (SJE). An SJE is instructed jointly by both parties, but their primary duty is to the court.
An SJE looks at:
- Profitability and income generation – How much revenue and profit the business generates over time.
- Tangible Assets – Equipment, inventory, real estate, and other physical resources.
- Intangible Assets – Goodwill, brand reputation, intellectual property, and client/customer relationships.
- Market Conditions – Economic climate and industry trends that may impact the business’ value.
Since financial reports only show a snapshot of the business’s finances at a given moment, the SJE usually looks beyond the books—factoring in projections, risks, and industry shifts to ensure the valuation reflects real-world conditions.
How is a Business Valued?
There are three primary methods used:
- Market Approach – Compares the business to similar companies that have recently been sold. This is useful if comparable sales exist but challenging if no/few are available.
- Income Approach – Evaluates future earning potential by converting projected income or cash flow into present value. Ideal for stable businesses with predictable revenues and a stable cash flow.
- Cost Approach – Estimates the value based on net assets, this often serves as a baseline valuation method.
Each approach has its strengths and weaknesses. The SJE should explain which approach or combination has been used, and why.
Challenges in Business Valuation During Divorce
Subjectivity in Valuation Some businesses are harder to value, such as family-run operations which are deeply tied to one party’s expertise or relationships. Factors like the below must be considered:
- Heavy reliance on one party’s expertise or relationships.
- Goodwill tied to personal reputation rather than the brand.
- Courts must separate personal goodwill (linked to one party’s skills) from enterprise goodwill (attached to the business itself).
For example, if one party runs a small accountancy firm where clients trust them personally, the value of the business may drop if they leave.
Fluctuating Valuations
- Seasonal businesses (e.g., holiday rentals, agriculture) require specialised valuation methods.
- Startups and high-growth companies pose challenges due to their uncertain futures and evolving profitability.
Market vs. Sentimental Value
Emotional attachment can result in one or both parties overestimating what a business is worth. The valuation obtained as part of the court process should refer to market-driven assessments, such as financial data and market realities, rather than sentimental value.
So, once the business is valued, what are the options?
Option 1: One Party Buys Out the Other
In many cases, one party exits the business while the other retains ownership. “Consideration” (the buy-out payment) can take different forms:
- Lump-sum payment – A one-time payout to the departing party.
- Structured buy out- One party buys the other party out over time.
- Asset transfers – The business-owning party may transfer other assets (like the marital home) to balance the division.
Benefits:
- Provides closure and allows each party to move forward independently.
- Reduces the risk of future disputes.
- Ensures business continuity under one decisive leader.
Challenges:
- Can make the valuation process more contentious.
- Tax implications of transferring shares or assets.
- Ensuring the business retains enough liquidity to fund the buyout.
Option 2: Selling the Business and Splitting the Proceeds
If neither party wants to continue running the business, selling it may be the cleanest option.
Benefits:
- Simplifies asset division
- avoids future conflicts
Challenges:
- The business may not sell quickly or at the expected value
- Finding a buyer
- Agreeing on a valuation and sale terms
Option 3: Continuing as Business Partners
Though uncommon, some couples choose to remain co-owners post-divorce, particularly when:
- The business holds significant financial value
- Both parties play crucial roles in its success
Benefits:
- Maintains business continuity and (presumably) financial benefit for both parties
Challenges:
- Personal conflicts can affect business operations
- Difficulty separating personal and professional decisions
- It is not a “clean break”. The deal will need to be justified and explained to the court.
Strategies for Success:
- Clearly define post-divorce roles, boundaries and responsibilities.
- Establish formal legal agreements in relation to profit-sharing and governance.
- Create clear conflict resolution strategies.
- Create an exit strategy in case disputes arise.
Should the Business Continue? Key Questions:
- Can the business survive if one party leaves?
- Is maintaining family ownership more beneficial than the risk of potential conflict?
- Can assets be fairly split between liquid (cash, property) and illiquid (business shares, investments) assets?
- Would selling or dissolving the business provide better financial stability for both parties?
Legal Considerations: The Clean Break Principle
Under Section 25A of the Matrimonial Causes Act, courts must consider whether financial obligations between parties can be ended as soon as reasonably possible. It is what it says on the tin, a “clean break” and financial independence is preferred and should be achieved if possible. Selling or dissolving the business might be considered the best option if:
- The business cannot function independently without both parties.
- A sale would provide financial stability for both parties.
- Emotional conflicts make co-ownership impractical.
- One party seeks a fresh start without ongoing financial ties.
Final Thoughts
Dividing a business in a divorce isn’t just about money—it’s about securing a stable future for both parties. A fair outcome requires balancing legal, financial, and emotional considerations. The right approach depends on:
- The nature and structure of the business.
- Relationship dynamics between the parties.
- Long-term financial goals of the parties.
Expert Advice is Key:
- Consult legal, financial, and business experts to navigate this process smoothly.
- Carefully consider all options to achieve the best financial and personal outcome.
If you’re navigating a business division in a divorce, expert advice can make all the difference. Speak to Manders for professional guidance on obtaining business valuations and divorce settlements.
For an initial FREE consultation on any aspect of family law, call Manders Law on 01245 895 105 or email us here.
Note: this blog is intended to give an overview (rather than comprehensive guidance and advice) on your legal or financial position and is provided for information only. It is not an endorsement of any product or service provider.