Separation and divorce often make for a traumatic experience, and matters can be complex to resolve, particularly where one or both of a couple own a business.
The financial consequences of separation usually involve the 'matrimonial property' being identified, valued and divided, and many people are understandably concerned that a business they may have built up over a period of many years, if considered matrimonial property, could be put at risk as a consequence of that process.
However, if matters are handled properly and sensibly it should be possible to arrive at a solution which satisfies both spouses and ensures the survival of the business. This generally makes sense for all concerned. After all, if the enterprise is damaged in any way, then it can cause problems in the future, not just for the business owner, but for an estranged spouse as well _ it may for example affect the amount of ongoing support that can be paid from income.
In the event of a separation involving a business owner, matters do tend to focus upon establishing the value of the business in question. Often it is necessary to involve good forensic accountants to determine the relevant value but unfortunately they do not come cheaply. One way of reducing the cost, however, is if both parties can agree to use a single accountant with a view to abiding by his or her value.
Generally, speaking, one of two approaches is usually adopted in valuing shares in a private limited company. An 'asset basis' approach looks at the actual (not paper) value of the net assets. Adjustments are often made for other issues such as taxation. This kind of valuation can be appropriate for companies holding a lot of tangible assets _ for instance a property portfolio. However, it may not be suitable for a service based company where the value is in the profits generated by the going concern. In this case an 'earnings basis' approach is often applied. This looks at the future maintainable earnings of the business going forward. Accountants will then apply a multiplier to such earnings known as a 'price earnings (P/E) ratio'.
The appropriate multiplier is arrived at by looking at public companies in the same sector as the business in question. The P/E ratios of listed companies are publicly available so they offer a good starting point to work from.
Individual companies in much the same line of business can, of course, have different P/E ratios so a median figure is usually adopted. That figure is then adjusted to take account of the fact that the company in question is not quoted on the Stock Exchange, and the scale of its operation is likely to be smaller than that of listed counterparts.
Once the value of the business has been ascertained or agreed, another significant issue can arise _ namely finding the money to pay out the appropriate value to the non-business owner. It is of course possible that a deal can be done by drawing on other assets outside the business to finance payment, but that is not always possible.
If funds have to be found from the business to finance a deal, ways of raising the finance can include a part or full sale of the shares, the release of cash from the business via director's loans, or distribution of profit, often over a number of years into the future.
In resolving financial issues arising from relationship breakdown, adopting a constructive problem solving approach is almost always better geared to finding an appropriate solution that works for everyone. Adopting a position orientated approach tends to polarise parties and can often end up leading to litigation. Litigation costs a lot of money, and makes resolution less straightforward, leading to a lot of acrimony that is in nobody's interests.
Most separating couples now see the sense of cooperating with each other along with their lawyers to find pragmatic and fair solutions. Dealing with matters in such a way, particularly when business interests are involved, opens up the range of solutions that are possible. If settlement terms can be agreed, that tends to remove the huge uncertainty and cost associated with litigation.
An agreed settlement may not ease the pain of divorce, but at least it can lower the burden of conflict and ensure a fair and workable solution is found and that ultimately benefits everyone.
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