A recent case highlights the position of a singleton business and some of the arguments that can sometimes arise around the valuation and treatment of goodwill where there is a divorce.
Business valuations in divorce proceedings
The approach often taken to business valuations in divorce proceedings is dictated by the International Valuation Standards (IVS) 2022, which provides the following definition to market value:
“the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”
Application to a singleton business
Its application to a singleton business was considered in the recent case CG v SG [2023] EWHC 942 (Fam). The case involved a husband’s interest in a financial services limited liability partnership (LLP). The business was established in the late 2000s by the husband and two other partners. However, at the time of the hearing, the husband was the sole partner. His entitlement to the profits was approximated at 95%. Once the external investors (who included the husband himself) were paid back their capital, the husband’s entitlement as partner would have increased to 100%.
It was estimated that the husband earned 90% of the fees within the business, and that this was made possible by his business contacts, knowledge, and reputation. At the hearing, the judge concluded that the LLP was a “singleton” business, whose success was dependent on the husband alone. The business could only be sold with the husband’s continued, dominant involvement. In other words, the business and the husband were not mutually exclusive – there was no goodwill attached to the LLP as a separate entity.
As per the IVS principle, no buyer would have been willing to accept the business’s retention of the husband following sale. What’s more, the husband, as seller would not have been willing to sell his business (and transfer his income stream) whilst continuing his demanding role there.
Ultimately, the husband’s business interest was valued by reference to his capital account, and position as an external investor. No goodwill was attributed to his interest.
Seeking specialist advice
The business in CG v SG is a good example of a singleton business, dependent on the spouse’s ongoing involvement. However, all cases differ. If you are looking at a divorce and think your business or your spouse’s business raises issues similar to this, it is important that you seek specialist advice.
If you need any support regarding financial aspects relating to separation please contact our Family Law team and we would be happy to help.