Company valuation methods and dispute

[JDX_John]

My spouse and I own a small educational service business which employs a handful of people and has turnover ~100k.

We need to have this valued because we are in the middle of a divorce. Initially a simple net assets approach was used which I was quite happy with - the business has little in the way of tangible assets or debts, basically "cash in the bank". Let's say this gave a valuation of £80k. This value was accepted by both of us on official forms.

Later, a different valuation was supplied without explanation, let's say £40k, as part of a settlement proposal (which would lead to a significant advantage in her favour as she wants to end up owning the business outright). When I asked about it, I was told this was calculated using a different method including EBIT, PAT, P/E ratio, etc. Our accountant has now written a note saying she considers this the more appropriate method, but I totally disagree and so does a friend who is an experienced accountant, CFO and knows our business quite well (he provided some consultancy when we set it up). He strongly asserts NAV is the more appropriate way to approach this.

I'd appreciate any general advice on how to approach this but also as a specific question.. does it make sense to value a business significantly lower than its net assets? My thought process is if the business could be asset stripped - in this case essentially the cash in the bank after any outstanding debts - then doesn't that form the minimum sensible valuation? If she values the business at £40k and I offer to buy it for £60k...

I can imagine the fact the accountant has weighed in makes this trickier to dispute but if it can't be settled, how do I go about formally challenging it?

Obviously its all stressful and this comes at a time when I hoped we were in the final stretch, now we're back to the beginning again!

 

[Newchodge]

You need to speak to your divorce lawyer.

 

[Mark T Jones]

The clichéd but true answer is 'it's worth what someone will pay'

If you want a top-dollar valuation, go to a dodgy business broker, who will say a spectacularly high number to get your signature on a contract (don't sign anything)


To get an actual, meaningful valuation would require a forensic audit, which will cost more than it's worth (perhaps suggest it to scare them)

Or just pitch in with an offer to buy just over £40k

 

[UKSBD]

Who wants the business - you or here?

 

[JDX_John]

Who wants the business - you or here?

We've agreed that she'll have the business in its entirety as part of our settlement.
Her accountant did provide both valuation figures in an initial email but the NAV one was put on her "asset declaration" form and I agreed this was reasonable. I had no further communication about it until I happened to notice the lower value had been switched in in a valuation/proposal. Only because I was setting up a spreadsheet of everything to check their numbers.

 

[DontAsk]

She wants the, hypothetical, £80k cash in the bank for £40k?

Tell her and the accountant to do one.

 

[JDX_John]

She wants the, hypothetical, £80k cash in the bank for £40k?

Tell her and the accountant to do one.

I wouldn't quite put it that way but I guess that's the rub of it, cynically speaking. Nobody wants the company to cease trading but if I have £100 in my wallet, I can't realistically claim it's worth £80?

 

[Lisa Thomas]

Is she buying the company's assets, or your shares?

 

[Lisa Thomas]

I wouldn't quite put it that way but I guess that's the rub of it, cynically speaking. Nobody wants the company to cease trading but if I have £100 in my wallet, I can't realistically claim it's worth £80?

Has goodwill been included in the valuation?

 

[JDX_John]

Is she buying the company's assets, or your shares?

She's not buying anything, regardless of share ownership the business is part of our matrimonial assets. I'd transfer shares to her and resign, but as we decide who gets what the valuation of the business obviously affects that... our house is worth X, the business Y, our savings and pensions Z, so we need to know what X+Y+Z is in order to fairly split it all and neither of us wants the business to be wound up as part of the process.

Has goodwill been included in the valuation?

In what sense? Is that a technical term or more just "playing nice"? Thus far we are just trying to get a paper value of all our matrimonial assets so we can then negotiate the split (starting from 50:50) from the headline figure. I thought we'd done that already as we have valued properties and ISAs and pensions without quibble.

 

[numbersrule]

In what sense? Is that a technical term or more just "playing nice"? Thus far we are just trying to get a paper value of all our matrimonial assets so we can then negotiate the split (starting from 50:50) from the headline figure. I thought we'd done that already as we have valued properties and ISAs and pensions without quibble.

Goodwill is an intangible asset based on the value added to a business as a result of it's reputation, customer base, and future prospects. If Goodwill has never been valued, then it might be a reason why the business could be worth more than NAV.

Conversely, if you wish to understand why a business may be worth less than NAV then consider that valuations are sometimes based on a multiplier of Net Profits ( ie future earning potential over a period of say 3 years ). So let's say your 100k turnover resulted in 13.33k Net Profits at the most recent Annual Filing then 3 x 13.33 = the alternative valuation.

If that is indeed where the other side are with this, then your counter argument should revolve around Lisa Thomas's suggestion about Goodwill and then you might end up back in the happy middle ground of NAV.

This needs to be based on a mutual understanding as opposed to getting embroiled in the technicalities of valuations which Mark T Jones has explained the pitfalls.

Another way of looking at it is how much of that NAV is Debtors ie money owed to the business? Is the NAV certain or uncertain in terms of those Debtors? Or if most of the NAV is cash in the bank, then how much of that cash is actually needed from a cash flow perspective? There can be situations where a Profit multiplier valuation still remains the same even after taking cash out of the business. If that is the case then it's a clear argument for saying that the profit multiplier method is not appropriate here.

 

[Clinton]

Just as goodwill is an asset that doesn't appear on the balance sheet (normally), there are liabilities that don't appear on the balance sheet - like the costs of any potential HMRC investigation, litigation by a past customer, all sorts.

Intangible, off-balance sheet assets, like goodwill, have value. Those off-balance sheets liabilities detract from the value. To what extent? That's up to individual valuers to assess based on each individual's assessment and perception.

You're barking up silly tree if you think there's some formal way to value this 'job' of yours! There isn't.

You're grasping NAV, she's clinging on to something else but the nub of the matter is that this is worthless as a "business". Those off-balance sheet assets are liabilities are so minor as to not be worth the effort of any potential buyer. That means there is £0 transferable value in the business.

I was told this was calculated using a different method including EBIT, PAT, P/E ratio, etc. Our accountant has now written a note saying she considers this the more appropriate method...

So go hire a different accountant, preferably a big name corporate finance firm more familiar with valuations that your common garden accountant. Tell them what valuation you want. Pay their fee. Bingo, get the valuation you want all backed up by the reputation of the firm.

Or split the cash in the business 50-50 and give her the business for free.

 

[UK Contractor Accountant]

Or split the cash in the business 50-50 and give her the business for free.

this is the best solution - a bit more involved if the business is a limited company

 

[Newchodge]

this is the best solution - a bit more involved if the business is a limited company

That means she receives double?

 

[UK Contractor Accountant]

That means she receives double?

why does it? she gets the rest of the shares in exchange for 50% of the bank balance at date of transfer

 

[Newchodge]

why does it? she gets the rest of the shares in exchange for 50% of the bank balance at date of transfer

The business has a turnover of £100K. Both parties share the cash in bank (£40K each) and she also gets the business.

 

[Ziggy2024]

The business has a turnover of £100K. Both parties share the cash in bank (£40K each) and she also gets the business.

She doesn't get £40k. That remains in the company.

 

[DoolallyTap]

The more advise you ask for, the more contradictory answers you will receive. The more you ask solicitors and lawyers the more expensive it will cost. If you were both happy with the first figures accept them and move on, if there is a fight between you, let the judge decide.

 

[JEREMY HAWKE]

With a turn over of 100K it probably has very little value
In my view it must be a real struggle employing people with such a small turn over and I would be questioning if it is a liability rather than an asset

 

[JDX_John]

Goodwill is an intangible asset based on the value added to a business as a result of it's reputation, customer base, and future prospects. If Goodwill has never been valued, then it might be a reason why the business could be worth more than NAV.

Conversely, if you wish to understand why a business may be worth less than NAV then consider that valuations are sometimes based on a multiplier of Net Profits ( ie future earning potential over a period of say 3 years ). So let's say your 100k turnover resulted in 13.33k Net Profits at the most recent Annual Filing then 3 x 13.33 = the alternative valuation.

If that is indeed where the other side are with this, then your counter argument should revolve around Lisa Thomas's suggestion about Goodwill and then you might end up back in the happy middle ground of NAV.

This needs to be based on a mutual understanding as opposed to getting embroiled in the technicalities of valuations which Mark T Jones has explained the pitfalls.

Another way of looking at it is how much of that NAV is Debtors ie money owed to the business? Is the NAV certain or uncertain in terms of those Debtors? Or if most of the NAV is cash in the bank, then how much of that cash is actually needed from a cash flow perspective? There can be situations where a Profit multiplier valuation still remains the same even after taking cash out of the business. If that is the case then it's a clear argument for saying that the profit multiplier method is not appropriate here.

Thanks for this. The question I still have though is, how can you realistically value a company significantly less than its cash assets in the bank? The worst case is you asset-strip the company, cease trading and wind it up. That would have some associated costs but if I offered to sell you a company with £100k in the bank and no debts for £80k, would you buy it?
In this case the company is really the people - my ex is the manager and visionary behind it and the staff are a close-knit team. They wouldn't sell the business any more than a 1-man contractor would sell their PSC. This was kind of the argument I was given why the only realistic way to value such a business is assets - the value is really the reputation those people have built up, if tomorrow they founded "New Company Ltd" all the customers would simply move over and "Old Company Ltd" would be a husk containing a bunch of cash and little else.

 

[JDX_John]

Another way of looking at it is how much of that NAV is Debtors ie money owed to the business? Is the NAV certain or uncertain in terms of those Debtors? Or if most of the NAV is cash in the bank, then how much of that cash is actually needed from a cash flow perspective? There can be situations where a Profit multiplier valuation still remains the same even after taking cash out of the business. If that is the case then it's a clear argument for saying that the profit multiplier method is not appropriate here.

That's an interesting point. When the accountant discussed her reasoning for not using NAV, they argued this was partly because the company has a significant cash in the bank in retained profits. Doesn't that increase rather than decrease the value - it's literally cash sat there which could be paid out as dividends?
Clearly cash position can be misleading if the company has upcoming unavoidable costs, that aren't debts. Salary liabilities, tax bills, etc.

I would like to be clear here I am not trying to squeeze her out of anything. I thought the previous valuation we'd agreed was reasonable, and was expecting we'd have got things sorted out by now. Suddenly a new figure appears on some paperwork _after_ we had agreed the old one, without any mention. I want her to have the business and continue with it, I put a lot of my time and energy into founding it as well as initial investment of 5 figures (which has been repaid, to be clear) and it provides a very valuable service. I just don't want to be taken for a ride.

 

[BubbaWY]

I cant help with the valuation, but can offer advice having recently taken my ex-wife to court to settle our finances.

Try and keep things amicable. Keep solicitors/accountants out of it as it will lead to dispute where the only winners are them with their fees. Be prepared to be flexible.

If you dont make progress and relations sour, take it to court and be Litigant in Person. It will save you a fortune.

 

[JDX_John]

I cant help with the valuation, but can offer advice having recently taken my ex-wife to court to settle our finances.

Try and keep things amicable. Keep solicitors/accountants out of it as it will lead to dispute where the only winners are them with their fees. Be prepared to be flexible.

If you dont make progress and relations sour, take it to court and be Litigant in Person. It will save you a fortune.

Thanks, I really want to avoid court (we both do I'm sure) but we are not on speaking terms.
Sorry you had a difficult situation yourself, must have been tough.

 

[JEREMY HAWKE]

This is getting proper Jeremy Kyle / Jerry Springer

I dont mind imparting my experiences in the discipline of making a business work for free but if it comes to marriage guidance and relation help then we are going to need your debit card numbers

 

[BubbaWY]

Thanks, I really want to avoid court (we both do I'm sure) but we are not on speaking terms.
Sorry you had a difficult situation yourself, must have been tough.

That makes it difficult. But if there is a willingness on both sides to resolve it amicably, do you both know and trust someone who could act as an intermediary so you dont have to deal with each other direct?

It was difficult, but enjoyed (in a weird way) representing myself, doing research and making her solicitor looks a complete numpty who was just after a pay day.

 

[Lisa Thomas]

I know an agent who can help with the valuation - feel free to dm me for details if you don't find one on here.

 

[Bobbo]

For a trading business a profits based valuation is likely to be the most appropriate. Have you been provided with the valuation calculation?

However, assuming the figure of 80k net assets (which you say is basically entirely cash) is broadly accurate and the turnover is circa 100k it sounds like the company has much more cash than it needs for its day to day operations.

As such a reasonable valuation might be a profit multiple calculation plus the excess cash:

Say
profit based value 40,000
excess cash (say total cash 80k less 25k three months turnover) 55,000

= total value 95,000

 

[campbeji]

My spouse and I own a small educational service business which employs a handful of people and has turnover ~100k.

We need to have this valued because we are in the middle of a divorce. Initially a simple net assets approach was used which I was quite happy with - the business has little in the way of tangible assets or debts, basically "cash in the bank". Let's say this gave a valuation of £80k. This value was accepted by both of us on official forms.

Later, a different valuation was supplied without explanation, let's say £40k, as part of a settlement proposal (which would lead to a significant advantage in her favour as she wants to end up owning the business outright). When I asked about it, I was told this was calculated using a different method including EBIT, PAT, P/E ratio, etc. Our accountant has now written a note saying she considers this the more appropriate method, but I totally disagree and so does a friend who is an experienced accountant, CFO and knows our business quite well (he provided some consultancy when we set it up). He strongly asserts NAV is the more appropriate way to approach this.

I'd appreciate any general advice on how to approach this but also as a specific question.. does it make sense to value a business significantly lower than its net assets? My thought process is if the business could be asset stripped - in this case essentially the cash in the bank after any outstanding debts - then doesn't that form the minimum sensible valuation? If she values the business at £40k and I offer to buy it for £60k...

I can imagine the fact the accountant has weighed in makes this trickier to dispute but if it can't be settled, how do I go about formally challenging it?

Obviously its all stressful and this comes at a time when I hoped we were in the final stretch, now we're back to the beginning again!

Hi, You don't mention the structure of the business, I'm assuming it is a limited company, but maybe it's a partnership, this would make a difference I think.

Is there a chance that you could take the money out of the business, for the purpose of the valuation, and then do the valuation on the business after that.

Treat this advice like it came from some guy on the internet that probably doesn't know what he's talking about.

Good luck
Jim