When a couple goes through a divorce, the division of assets can become one of the most contentious aspects of the process. While things like property, pensions, and personal belongings often take centre stage, shares in private companies add a layer of financial and emotional complexity that cannot be overlooked. These assets, often less liquid and harder to value than public company shares, present unique challenges in both their assessment and equitable division.
What makes private company shares particularly complex in this context is their lack of an open market. Unlike publicly traded stocks, which have a transparent price based on daily trading activity, private company shares do not benefit from this kind of visibility. This creates complications not just for legal parties, but also for financial experts and, most importantly, for the individuals involved.
The Significance of Accurate Valuation
In a divorce settlement, achieving a fair and equitable distribution of marital assets is a fundamental goal. To do this, the value of each item must be reliably ascertained. When a spouse owns shares in a private company, whether as a founder, a partner, or a passive investor, these shares must be included in the asset pool for evaluation. Yet determining their true worth is often far from straightforward.
A flawed valuation, either inflated or undervalued, can severely skew settlement negotiations. An underestimated valuation may deprive a spouse of the compensation to which they are rightfully entitled. Conversely, an inflated one may burden the shareholder with an unrealistic financial obligation or transfer of equity. This is why courts and solicitors place high importance on obtaining an accurate, fair statement of value, and often turn to forensic accountants or business valuation specialists to carry out this detailed process.
Valuation Methodologies for Private Shares
There is no one-size-fits-all method for valuing private company shares, particularly in the context of divorce. The choice of methodology depends on a wide range of factors, including the nature of the business, its financial performance, its growth prospects, and the broader economic climate. Whether the business is a family-run enterprise, a professional practice, or a successful startup, each will necessitate a tailored approach.
There are three principal valuation approaches typically adopted, each with its own nuances and applications: the income approach, the market approach, and the asset-based approach.
The income approach focuses on the company’s ability to generate future earnings or cash flow. Here, discounted cash flow (DCF) analysis is frequently used. DCF projects future financial performance and then applies a discount rate to convert those projections into present-day value. While this method can yield accurate valuations, it rests heavily on assumptions about the future—something that can be speculative, particularly during the emotional and unpredictable atmosphere of divorce.
The market approach compares the private company in question to similar businesses that have been sold recently. This may include an analysis of price-to-earnings (P/E) ratios, revenue multiples, or other metrics used in M&A (mergers and acquisitions) activity. One challenge is that truly comparable private companies with transparent financials may be hard to find, especially if the company operates in a niche or highly specialised industry.
The asset-based approach evaluates a company’s worth based on the net value of its tangible and intangible assets. This method works well when the company holds significant physical or financial assets, such as property or portfolios, but it may underrepresent the value of key intangibles like goodwill, brand recognition, or intellectual property—factors that can be crucial in service-oriented businesses.
Adjustments for Real-World Limitations
A crucial part of valuing private shares involves applying appropriate discounts. This is particularly important because ownership in a private company is rarely straightforward, and the nature of the stake can heavily influence its value.
The discount for lack of marketability (DLOM) reflects the fact that private shares are not easily sold. Even if the stake has a certain theoretical value, it could take months, even years, to find a buyer—or it might never be sold at all. A DLOM can reduce the theoretical value of the shares by anywhere from 20% to 40%, depending on the specifics.
Similarly, a discount for lack of control is often applied when the shareholding is non-controlling. A minority shareholder has limited influence on how the company is run, making their stake inherently less valuable than a controlling interest. Courts typically recognise this reality and take it into account when determining equitable settlements.
In some instances, shareholders agreements or the company’s Articles of Association may further restrict the ability to sell or transfer shares. Such provisions can have a material impact on share value and must be carefully reviewed by the valuation expert.
Role of Forensic Accountants and Legal Teams
Given the technical nature of private share valuation, solicitors often rely on contributions from qualified forensic accountants. These experts possess not only financial acumen but also sensitivity to legal and procedural nuances. Their work often involves not just valuing the shares but also tracing their ownership history, understanding corporate structures, analysing dividends, and uncovering any financial manipulation or concealment that may distort the valuation.
Forensic accountants are particularly adept at recognising when a business owner may be attempting to suppress the apparent value of their interest—for example, by delaying the signing of major contracts, deferring income, or accelerating costs before valuation takes place. These strategies, while unethical and potentially illegal, are known to occur during the divorce process.
Solicitors play a similarly vital role, working in tandem with financial experts to craft compelling arguments, cross-examine reports, and negotiate terms that reflect the true value of assets. A deep understanding of family law, corporate structures, and matrimonial finance is essential for lawyers involved in such high-stakes work.
Emotional Ties and Psychological Considerations
While much of the discussion around share valuation is financial, one must not ignore the emotional investments and psychological dimensions involved. For many business owners, their company is the product of decades of work, sacrifice, and personal passion. The idea of sharing, selling, or even quantifying this element of their lives can evoke a strong emotional response.
This can influence decision-making on both sides of the divorce. The spouse who built the business may downplay its value out of fear of losing control, while the other may perceive the asset as an untapped source of wealth and demand a larger share. These differing perceptions often cause friction and can lead to protracted negotiations or legal battles.
Handling these emotional undercurrents requires tact and empathy from both lawyers and financial professionals. Mediation and collaborative law approaches are increasingly used in such cases to reach consensual, non-adversarial outcomes that acknowledge both the emotional and financial complexities at play.
Liquidity and Practicality of Settlement
A major practical consideration in dividing private company shares is the issue of liquidity. Unlike cash or publicly traded shares, private equities cannot easily be sold to raise capital. This poses challenges when a settlement requires one spouse to transfer funds to the other.
In cases where shares cannot realistically be sold or transferred, alternative mechanisms may be used. One approach is offsetting—where one spouse retains their full interest in the business while the other receives a greater share of liquid or tangible assets, like the family home or cash. Another possible solution is structured payments over time, drawn from company dividends or future buyout events.
In certain situations, particularly where both parties retain civil terms, co-ownership agreements or buy-back clauses may be introduced to mitigate future conflicts or force a buyout at a mutually agreed valuation.
Judicial Attitudes and Precedent
UK family courts have a fairly wide discretion when it comes to financial settlements, guided by the principle of fairness rather than strict formulae. This has led to a wide range of judicial approaches on private share valuation.
Some courts take a conservative view, applying generous discounts and placing greater emphasis on tangible liquidity. Others are more liberal in attributing value based on future earnings, particularly for stakes in high-growth or high-revenue ventures. The variation highlights the critical role of expert evidence and clear reasoning in advancing any valuation claim.
An added complicating factor is whether the shares are considered matrimonial or non-matrimonial property. If shares were acquired before the marriage, or inherited from family, they may not automatically form part of the divisible asset pool. However, even non-matrimonial assets can be brought into play if required to meet the needs of the other party, especially where children are involved.
Mitigating Disputes Through Pre-emptive Planning
One of the most effective ways to mitigate valuation disputes in the event of divorce is through proactive legal and financial planning. Prenuptial and postnuptial agreements that specifically address the treatment of business interests can provide an important layer of clarity and protection.
These agreements may set out how the shares should be valued, the parameters for any offsets or buyouts, and what role, if any, the non-owning spouse should have in the business. While prenups were once viewed with scepticism in the UK, recent legal developments have seen courts give more weight to properly executed agreements, especially when both parties had independent advice and entered into them freely.
Similarly, corporate governance structures including shareholder agreements can designate procedures for share valuation, exit clauses, or resolution of disputes. These documents can serve not only as an operational roadmap for the business, but also as a protective buffer against the shocks of marital breakdown.
Conclusion: Precision, Fairness, and Sensitivity Are Key
Valuing private company shares during divorce proceedings is a complex intersection of finance, law, and human emotion. It requires a deep understanding of accounting principles, legal precedents, and the personal circumstances of those involved. While no valuation can ever truly capture the full complexity of a business’s worth—particularly in such a sensitive context—striving for rigor, transparency, and fairness remains paramount.
Engaging experienced legal and financial advisors at the earliest opportunity can help mitigate conflict, protect business continuity, and provide both parties with a sense of closure and equity. Ultimately, the goal is not simply to divide assets, but to lay the groundwork for two separate lives to move forward with stability, dignity, and security.