Growing apart pains
In recent years there has been a decline in the number of people who choose to marry, but many still do and sadly not all marriages last forever - indeed, the average marriage currently lasts around 11 years. But what happens if the husband and wife own and manage a business?
Somewhat surprisingly in many cases the business relationship survives. Where this isn't the case there are a number of options, including:
- One party leaving the business and being replaced;
- The parties agreeing to divide the business between them; or
- The business being sold in its entirety.
In any event, unless the business is actually sold, it will need to be valued. So how is this done?
There are a number of ways that a business could be valued, and pretty much all of them are a reflection of the value that could be generated from future profits or cash generation. For example, some industries, such as professional practices, are valued based on turnover, whereas pubs historically were evaluated in terms of the barrelage of beer sold. In most circumstances valuations are based on a multiple of future profits.
Where valuation follows this earnings multiple approach, the first step is to calculate the underlying maintainable earnings. This is usually done by reference to recent profit generation, although longer periods of earnings can be looked at when profitability varies over a longer economic cycle.
Adjustments do need to be made, for example, to reflect a fair open market salary for the work done by shareholders as they can often pay themselves largely by dividends which are not a deduction from profits.
The resulting profit figure needs to be multiplied by a suitable multiple. This can vary due to a number of factors, including the size of the business and the underlying level of certainty that income can be maintained. Larger and less risky businesses tend to attract a higher multiple. Finally any surplus assets need to be added to the valuation.
Sadly divorce and the valuation of the underlying business that results are a well worn path and the use of an experienced business valuer can help resolve this issue without too much difficulty.
Robert Holland is a Partner at James Cowper LLP, accountants and business advisers in the Thames Valley. He can be reached by email: rholland@jamescowper.co.uk. For more information visit www.jamescowper.co.uk.
15.04.11