Valuing business interests
When looking at business interests, we act either for:
- the "business-person" (e.g. owner / director / partner) who wants to determine how best to disclose the interests appropriately in his or her Form E; or
- the spouse, who is usually (but not always) outside the business (the "outsider") and who is keen to understand whether those interests are properly valued.
Acting for the business-person
Making indicative valuations of business interests
We undertake indicative business and share valuations with and on behalf of our client.
We learn about the business and its particular features and trading performance and, together with the client, we construct a carefully considered and agreed valuation to present to the other side. The valuation of unquoted shares or family businesses will always be somewhat subjective because of the theoretical nature of the exercise. A true market value only emerges upon sale, which is unlikely to occur in the context of a divorce. Small minority shareholdings present their own challenges.
The eventual valuation is submitted as an addendum to Form E. The valuation is fully explained and documented and is supported by commentaries on the historic activities and summarised financial data extracted from the business accounts.
Whilst we endeavor to present a fair and realistic assessment of value, since we only act for one party the valuation would not be considered as impartial. Hence we cannot provide reports for use by both parties, sometimes referred to a "single joint-expert" reports.
Producing accounts
We can assist in producing accounts for small businesses to meet the requirements of Form E. For example, an up to date profit and loss account for a sole-trader. For landlords, we can construct the necessary income and expenditure accounts and calculation of potential Capital Gains Tax on disposal.
Acting for the outsider
The two principal areas of importance are:
- Assessing the income derived from the business
Income can be disguised or mis-represented in a variety of ways but by carefully questioning and examining bank details, business accounts and other data we seek to gauge the spouse’s actual income / remuneration / drawings arising from his or her business interests.
- Valuing the business interests
Establishing the value of business interests is often the most highly-charged and contested element in the divorce’s finance wrangling.
In the following paragraphs we present a brief overview of some typical aspects of work:
- Desktop review of business activities
- Challenging a valuation
- Investigation
Desktop review of business activities
We undertake quick reviews of family companies and business activities. Such reviews are undertaken in the office and typically take 1 – 2 days, depending on the detail required.
Specifically we are looking for pointers to suggest that:
- the business interests are different, or more extensive from those disclosed
- the business value may be higher than suggested
- the spouse’s earnings are being manipulated downwards
The review is often instigated soon after the spouse’s Form E is received and the review is a useful and low-cost first stage to identify the range of issues arising and the worthwhile areas to explore.
Having reported back on our findings we can then draft the necessary questions for the solicitor to put to the other side to elicit further information.
Challenging a valuation
What might be an appropriate valuation methodology? Sometimes a valuation is evidently wrong, and sometimes it includes subjective elements, e.g. applying discounts or averaging profits, which combine to work against one party.
We can review and challenge authoritatively a valuation presented by the other party, point by point. This challenge might be to the initial valuation presented by the spouse with Form E, or it may be necessary to challenge a formal valuation produced under the auspices of a Court order.
In both cases our report can be used by Counsel during Court hearings and negotiations.
Investigation
We use the term ‘investigation’ to encompass various elements of work to help build a case against the other side that the true levels of business profitability / assets are different from those stated, and hence the business valuation is higher.
Smaller companies or partnerships may never have been audited, and that inevitably raises questions over the completeness and accuracy of their accounts. In the absence of an audit, enabling us to undertake a tightly focused examination of the key areas is a cost-effective approach and this can occur off-site or, if permission is granted, at the business itself.
As a starting pointy we consider whether the accounts be relied upon and the risk that there might have been a deliberate attempt to misrepresent the numbers.
We work to unravel complex corporate structures and family shareholdings, and we investigate the use of trusts and off-shore vehicles.
In smaller companies we check for signs of :
- unlikely or unreasonable financial results.
- goodwill or other business assets being undervalued;
- ‘managing’ down the trade, delaying income, diverting income or overstating costs so as to depress the valuation;
- poor or ‘foggy’ accounting which may create inaccuracies in the reported earnings and assets;
- siphoning off of profitable parts of the business to another entity as a deliberate ploy to transfer value out of the matrimonial pot;
- booking personal expenditure to the company, thereby artificially increasing business costs, which might give a financial advantage at the expense of the other;
- inappropriate transactions; cash, directors’ loans and dividends moving money out of the business.