Ask the Expert: Part 5 | Valuation methods

In the fifth instalment of our Ask the Expert: Valuing a business for divorce series, Malcolm Coomber provides an explanation of the key valuation approaches – earnings, dividend, and asset-based, and when each is used.

Q: How is a business actually valued in the context of divorce?

There’s no one-size-fits-all answer. The value of a business depends on many factors – the economy, the industry, and the business itself. That said, there are three main approaches we typically consider: earnings-based, dividend-based, and asset-based valuations.

Q: What is an earnings-based valuation?

This is the most common method, especially for trading businesses. It looks at past earnings but focuses more on future earning potential. We apply a price/earnings multiple, which is influenced by factors like market conditions, comparable businesses, and recent transactions.

In certain circumstances it can be more appropriate to consider future cash flows of the business and to discuss the use of a Discounted Cash Flow model with your advisers.

Q: When would you use a dividend-based valuation?

This method is often used for minority shareholdings, where the value lies in the income stream rather than control. It considers historic and anticipated future dividends to determine value.

Q: What about asset-based valuations?

These are more relevant for businesses where the value lies in physical assets, like farms or property investment companies. In such cases, the assets themselves play a much larger role in determining value.

Q: What information do you typically need to carry out a valuation?

We usually ask for: 

• Three years of financial accounts 

• Up-to-date management accounts 

• Budgets, forecasts, and business plans 

• Articles of Association or partnership agreements 

• Details of any Shareholders Agreement. 

• Details of any recent share transactions or offers 

• Valuations of key assets like property 

Q: Is it just about the value, or are there other considerations?

Liquidity is just as important. A business might be worth a lot on paper, but if it can’t generate cash, it may not be able to fund a settlement. We also consider tax implications and whether payments need to be made over time.