“When things go wrong, a responsible person does not look for culprits. He looks for solutions“- Haim Ginott
Introduction
The approach to the business valuation process can be summed up as follows:
- keep it SIMPLE,
- keep it RELEVANT to the issues and outcome(s) you are trying to achieve and,
- keep it PROPORTIONATE in terms of the time and costs spent obtaining valuation evidence compared with the value of the asset(s) being considered in the divorce.
Just as if you were in court, we believe that the main three questions to focus on in mediation are:
- In your particular circumstances will it be possible to reach a ‘fair financial outcome’ without a formal business valuation carried out by an independent expert? And,
- If you do need a valuation, how much detail will you need in order to be able to explore the options you wish to explore, and
- How much should you spend on this?
These are important questions to ask at an early stage because they will inform and influence your thinking, the approach and process you follow.
Formal valuations can be expensive and prolong the whole process and, it has to be said, many situations simply do not require formal valuations.
The excellent organisation Resolution has produced the Family Law Handbook which some of your mediator will have a copy of. Chapter 9 provides an excellent summary of the main aspects and questions to answer relating to businesses on divorce.
If you have time and really want to get to grips with the law in this area we recommend reading the Guide to Good Practice for instructing Experts produced by Resolution (formerly the Solicitor’s family law association) which you will find in the useful documents section to this chapter.
Even though this guide relates to court proceedings, the principles and much of the recommended processes for selecting and instructing experts are equally relevant and valid for the mediation process.
Without intending to worry you, the area of business valuations and divorce can be complicated and full of potential pitfalls.
That said, partly because of this potential complexity it is too easy to fall into the trap of believing that just because there are business interests to take into account an expensive formal valuation is necessary on every occasion.
This is simply not the case!
When thinking about whether you will need a formal valuation you may also want to ask yourselves the following key questions, among others, which we return to in subsequent sections in this chapter;
- What are you trying to achieve with the valuation? Will it help you to fully explore and reality test the options you wish to explore- It is important that you have this discussion early on in the process (First mediation session) because it may well influence the approach you take to the process of obtaining valuation evidence.
- Is the business going to be sold? If not, is the valuation process not hypothetical anyway?
- What if it is a one-person business with very few assets, simply producing an income for the person such as a consultancy whether set up as a Limited Company or Sole Trader. Is a valuation really necessary?
- Is there any liquidity or cash in the business which can be extracted without damaging the business and what would be the tax consequences of doing so?
This chapter is most definitely not intended as a substitute for appropriate expert financial and legal advice. It is aimed more as a guide on;
- How to approach deciding whether you need an expert,
- How to go about selecting the right expert for the job and,
- How to instruct them, ensuring that they provide you with the information you need to be able to reach a fair financial outcome, in mediation.
In most situations involving business interests we recommend that you work with your solicitor to support you to make the right decisions, in mediation.
The amount of information and support your mediator can give you in respect of the questions above will largely depend on their financial expertise and whether, for example, they also have legal training.
If you have not already done so, you may want to read the chapter all about working with solicitors and what we refer to as ‘mediation teaming’ and our ‘supported mediation’ model in which you are supported by the most appropriate professional for the job in hand, at the most appropriate time, in the most efficient and cost effective way, as you journey through mediation working together to make the best decisions for both of you and your family.
Whether you need solicitors, accountants, financial advisers or other financial experts to help you, the key will be for the mediator to create a process which keeps you and your former partner firmly in the ‘decision making driving seats’, with enough financial and emotional support to be able to make your own decisions and to do all this in the most efficient, cost effective, joined up way.
When it comes to business interests and information, especially if you have not been a direct part of the business or used to dealing with the business, you will most likely need additional support from your solicitor and perhaps your own accountant (shadow accountant) and/or financial adviser working with you in a consultative capacity, helping you to work with your former partner and mediator, to select and instruct the right valuation expert and understand the valuation report when you received it.
In the next section we write about the need for proportionality in terms of how much to spend on obtaining valuation evidence depending on the issues, financial options you wish to explore and outcomes you hope to achieve, remembering the ultimate aim of achieving a fair financial outcome in a cost proportionate way.
When it comes to understanding what we mean by a fair financial outcome in law you may want to read, or re-read the chapter on how to reach your own financial agreements and what we write about applying the correct principles to achieve a fair financial outcome.
You will also find some excellent supporting guides in the resources section of that chapter.
Section 2
If you decide that a formal valuation is needed, in the section 2 of this chapter we cover whether you will each need your own expert or whether one expert, instructed by you both will be sufficient and, if so, how to go about selecting and instructing them.
Section 3
In section 3 we explain what your instructions to the expert might need to include depending on the issues and financial options you wish to explore and the outcome(s) you are trying to reach.
It is worth keeping in mind that however much information you provide in your instructions to the valuer there is a good chance they will require more information as they delve into the task of valuing the business. So be ready to answer their questions.
Section 4
In the section 4 we provide typical situation examples when a formal valuation is unlikely to be necessary.
Section 5
In section 5 we provide some typical examples when a formal valuation is likely to be necessary and cover some areas where the valuation expert can also help you with exploring the options and outcomes you wish to consider in mediation and the implications of these, in terms of timing and tax.
We do this because in mediation we find that some people quite understandably wish to get on with the process and want to know whether they can avoid the expense and time of obtaining a proper valuation, where as in some circumstances, it is inappropriate to do so.
We refer to and provide the following guides in support of this chapter:
- Resolution guide to instructing accountant to assist with tax and company valuation 2018
- Resolution guide to instructing experts 2016
- A Guidance for instructing experts produced by the Civil Justice Council
- A court Practice Direction no 35 providing guidance on instructing experts
- Instruction template
- Form E-Business assets section
- 5 session mediation process map
- Accountant’s role in mediation process (Mediation Teaming)- Power point (If you wish to read the case study to this please ask the author for a copy)
We hope that these 5 sections and supporting guides give you enough to think about and work with in mediation, for now.