So how can a business be valued in mediation?
Business ownership is on the rise so having a value for business interests can be an important part of the mediation process.
One of the most significant benefits of mediation is that it gives couples greater control over the separation and divorce process. In terms of business valuation, that means deciding how a business asset should be considered. This flexibility isn’t always available if a case goes to court. Business ownership is on the rise so it is becoming increasingly likely that a business may need to be looked at as part of sharing assets fairly on separation and divorce.
What happens to business assets depends on many factors, including whether the business is shared between a couple or if only one spouse owns it. Business interests are generally considered a matrimonial asset, especially if set up or developed within the marriage.
Depending on the circumstances, the person owning the business may be left with the business but needing to compensate the other spouse with a larger share of other assets, a maintenance payment, or sharing the business income or dividing the shares between them. Sometimes the business may continue in joint names for joint benefit. All these options can be explored and discussed in the mediation meetings.
Some businesses do not have an asset value that is worth considering. For example, a plumber with his own business, may only have a vehicle, tools and a phone as business assets. They just use the business to earn income. There would not be anything substantial that could be sold, such as a customer list and if that's the case, there's no need to have a separate value of the business beyond any cash in the bank and the small assets of value the business owns.
If someone owns a family business with parents, siblings or another relative, their interest is likely to be considered as a shared asset. Any share of the family business not owned by either spouse will not be considered as a marital asset. How a business is divided will largely depend on how the business is structured and the particular circumstances. A minority discount may apply to the valuation of any relevant shares. An accountant can be asked to help value these types of business interests.
For other businesses/companies it might also be necessary to ask an accountant to prepare a report so that everyone knows the value of what is involved.
When valuing a business, the following is often considered:
· The assets the business owns (e.g. stock, property)
· Its earnings, this includes the profits that have been made and are expected to be made in the future
· The structure and ownership of the business (e.g. if it’s a partnership, sole trader or a limited company)
· Any shareholder agreements
· Whether there are any third-party interests
· Liabilities including tax
· Liquidity and the possibility of taking capital out of the business
There are four main methods of valuing a private company. The first is an earnings based valuation, which examines the future earnings potential of the company. This is the most common valuation approach when valuing an entire company. A price/earnings ratio is applied to an assessment of the maintainable earnings of the company and the accountant will look at comparable companies and ongoing deals with other companies to achieve this. A discount is usually given to minority shareholdings which can often be difficult to realise.
The second method is a dividend based valuation, which looks at the expected future dividends of the company. This method is appropriate for valuing small minority interests although dividends are often difficult to predict.
The third method is the discounted cashflow based valuation. This looks at the company’s anticipated cashflow well into the future and then applies an appropriate discount rate. This method is used when valuing a company in its entirety and when the company’s future cashflow can be estimated with reasonable accuracy.
The fourth basis of a valuation is an asset based valuation. This is particularly appropriate where the value of the company is largely in its fixed assets, such as a farm. This may need the additional input of a surveyor to value the assets and assess their income potential.
What are the options?
1. If the business is a company, shares can be transferred from one spouse to the other. It would be rare to do this where only one spouse owns shares in the company as this would go against the clean break principle. It could also cause disruption to the running of the business given that a new shareholder would not necessarily be familiar with the business.
However, couples sometimes agree to do this where the business makes up a significant element of the matrimonial assets and there isn’t enough cash or other assets to set off the value.
If a transfer of shares is to take place, a shareholder agreement may be required to make sure that the income from those shares is protected, particularly where the business owning party wishes to retain voting rights connected with those shares.
2. A lump sum payment to the party without a shareholding in return for the party, who has shares in a company, retaining their interest. This is often where a report from an accountant maybe helpful.
3. Monthly or annual payments. Where a lump sum payment cannot be paid, for example, where immediate capital is insufficient due to the business being illiquid, monthly or annual payments can be agreed.
4. Sometimes agreements can be reached where payment is delayed until the sale of the business or the particular shares held.
5. A sale of the business (in relevant situations) can be another option but all other options are normally considered first.
6. Any other options? The very point of mediation is that it enables couples to be creative about the solution they may choose.
When looking at business assets, if a couple agree that the preparation of a report would be helpful, we can recommend experts who can help. We will discuss their involvement with you in detail.