Every now and then a family lawyer will come across a case that teaches lessons to all the professionals involved. I had such a case a number of years ago that involved a family business.

My client was an entrepreneur who had a business which, at first glance, seemed quite exciting: it apparently had outlets in a number of different countries and when my client had been pitching to secure investment, he gave it a valuation of ‘millions’. This caused much excitement to the other side, who became convinced that the business was, indeed, worth millions which propelled the case from the ordinary to the extraordinary. However my client was something of a Del Boy Trotter character with the ever optimistic attitude that next year he would be a ‘millionaire’, and the paperwork I had seen simply did not support such a buoyant attitude.

We exchanged the mandatory financial disclosure, which suggested that the business was not worth very much at all. The other side could not accept this and requested more and more paperwork to try to find what they believed to be the true value of the business. Dissatisfied with the revelations contained within the paperwork and convinced that the business was genuinely worth millions, they requested a formal business valuation by a professional who would charge a very hefty fee (to be met by my client).  

The valuation went ahead, with the report indicating that the value of the business was a mere £1k.  By this point legal fees had reached a staggering amount, and so much money had been removed from the business to meet professional fees that the business was now all but insolvent. 

What lessons can be learned from this? Well, quite a few actually, particularly when business ownership is involved:

1 Ahead of cohabitation or marriage, or indeed upon marriage, enter into an agreement with your partner that clearly states what will happen to the business if you were to separate.  Pre and Post Nuptial Agreements are underutilised but are essential tools that can protect assets from uncertainty on separation.

2 Get your paperwork in order. Make sure you have up to date accounts, cash flow projections, monthly management accounts and so forth. Allow access to the business’s accountant so that information can be gathered quickly and questions answered.

3 Businesses are notoriously difficult to value: specialists will apply different formulas that will produce as many results as there are experts offering their services. It is therefore essential to choose an expert who has experience in valuing businesses in the sector that yours is in.

4 Consider if it is proportionate to get the business valued. As the above case highlights, someone’s personal estimate of what their business is worth can be very different in reality.  It could also be the case that a business is purely an income generating vehicle, with very little capital value. If you are not sure, then it is worth employing your own expert accountant to give an initial feel for whether a valuation would be beneficial. This could save you thousands in pursing a potentially unnecessary valuation.

5 Do not resist a valuation. Courts order businesses to be valued as a matter of course and it is often essential to obtain them to ensure that negotiations to settle can progress.

6 Do not start moving money out of the business or doing anything to try to decrease its value. The Court will simply add back in what you have tried to remove, and it will severely undermine your credibility before the Court.

7 Are there other owners? If so this will have a bearing on what can be done with the business and how your interest will be valued.

8 How do you realise your interest in the business? Both parties need to be realistic about what they are trying to achieve. It may be that the business does have some value but neither party can realise that interest without destabilising the business. How else, therefore, might the business be dealt with to provide a fair result? It may be that the non-business owner is compensated out of the other assets and/or receives a monthly income to compensate for not pursuing their interest in the business. However, is it fair that one party is left with the illiquid risk laden assets whilst the other party secures capital and income so that they can move on? All options need careful consideration. 

A family business will often provide financial stability to the entire family, and it’s therefore important to tread carefully when assessing its value to ensure that it can continue to support the entire family post-separation if that’s what is required. Expert advice is essential to secure the right result.

Samantha Jago is a Partner and qualified mediator in DMH Stallard’s Family
team. Contact her at samantha.jago@dmhstallard.com, or call 01483 467437. www.dmhstallard.com