The McMahon Two‑Stage Approach: Deferred Consideration and Deliberate Dissipation in Valuing and Dividing Business Assets under the Family Law (Scotland) Act 1985

Introduction

In Nicola Drummond or McMahon v John Gilbert McMahon [2025] CSOH 83, Lord Braid (Outer House, Court of Session) granted decree of divorce and delivered an important opinion on financial provision, particularly on how to value and divide a family business where the principal earner has allegedly depressed value post‑separation. The case centers on Advantage Wealth Management Ltd (AWM), an independent financial advisory (IFA) firm jointly owned by the parties (one ordinary share each), and on the former matrimonial home held in the pursuer’s sole name.

The central legal questions were:

Whether the shares in AWM should be valued at the “relevant date” or by reference to current value (given a steep drop in value post‑separation).
How to handle “deferred consideration” (earn‑out style) when valuing shares as matrimonial property at the relevant date.
Whether the defender’s conduct in “switching off” client fees, failing to appoint a locum, moving clients to cash, and preparing to novate clients to a new vehicle amounted to dissipation justifying restorative measures.
What orders would achieve fair sharing under sections 8–11 of the Family Law (Scotland) Act 1985 (the 1985 Act).

The judgment breaks new ground by articulating a practical, two‑stage method for valuing shares at the relevant date where a sale would likely include deferred consideration, and by demonstrating how the court can restore the non‑dissipating spouse to the position they would have occupied but for deliberate post‑separation value depression.

Summary of the Judgment

Divorce was granted on the basis of one year’s separation with consent. No children’s orders were necessary.
On the matrimonial property pool, most asset values were agreed. Disputes focused on:
- Valuation of AWM at the relevant date versus current value, and how to treat deferred consideration.
- Who should retain the former matrimonial home.
- Valuation of the pursuer’s jewellery (resolved at £400).
AWM: As at 30 June 2025, its current value was agreed at £505,000. Expert valuations for the relevant date (12 August 2024) differed. The court adopted an earnings-based figure of £1,777,000 as the provisional relevant date value (before deferred consideration adjustments).
Deferred consideration: The court held that, in a hypothetical sale, 50% of the price would likely be deferred over 2–3 years and be contingent on performance and client retention. It would be illegitimate to assume the defender’s continued post‑separation labour for the company. Applying a probability‑weighted adjustment, the court treated only 15% of the deferred half as likely to be realized, producing a relevant date value of £1,021,775, i.e. £510,888 per share.
Dissipation: Lord Braid found that the defender deliberately depressed AWM’s value post‑separation (switching off fees en masse, not appointing a locum, moving clients into cash, preparing to transition clients to a new entity), amounting to “special circumstances” (s10(6)(c)) and “conduct adversely affecting financial resources” (s11(7)(a)).
Orders: The pursuer keeps the former matrimonial home; the defender acquires the pursuer’s share in AWM via an incidental order (s14(2)(k)); and the defender must pay a capital sum of £215,726 within one month (interest at 8% thereafter). Interim interdicts were recalled; expenses reserved.

Analysis

Statutory Framework and Structure

Section 8: Court’s powers to order capital sums and transfer of property (s8(1)(a), s8(1)(aa)). The order must be justified by s9 principles and reasonable having regard to resources (s8(2), s27).
Section 9(1)(a): Net value of matrimonial property to be shared “fairly” (normally equally).
Section 10: Valuation rules
- Normally, value at the “relevant date” (s10(2), s10(3)).
- Special circumstances (s10(6)) can justify unequal sharing (including “destruction, dissipation or alienation” of property: s10(6)(c)).
- When property is transferred under s8(1)(aa), the “appropriate valuation date” is generally the date of the order (s10(3A)).
Section 11(7)(a): Court may take account of conduct only if it has adversely affected the financial resources relevant to the financial provision decision.
Section 14(2)(k): Incidental orders, including ancillary orders expedient to give effect to s9 principles or to an s8(2) order.

Precedents and Authorities Cited

Sweeney v Sweeney 2004 SC 372: Value as price on a hypothetical sale at the valuation date. Here used to frame the valuation exercise. Importantly, Sweeney does not require that deferred consideration be ignored; a price payable by instalments remains a price.
McConnell v McConnell 1997 Fam LR 97: Key principle that the non‑earning spouse cannot, via valuation assumptions, participate in property generated by the other spouse’s post‑relevant date efforts. Applied here to reject assuming the defender’s continued involvement post‑separation when estimating realization of deferred consideration.
T v T 2021 CSOH 6: The court used escrow to accommodate contingent liabilities so as not to over‑ or under‑state value. Analogically, McMahon endorses calibrating value for contingencies rather than mechanically halving or ignoring deferred elements.
Murdoch v Murdoch 2012 SC 271: Confirms competency of using a capital sum coupled with an incidental order (s14(2)(k)) to effect a transfer of shares, rather than a direct s8(1)(aa) transfer.
Foster v Foster 2024 SC 99: Warns against using a members’ voluntary liquidation to “work through” rights where it frustrates fair sharing; confirms the court’s preference for clean‑break structuring within the statutory framework.
Clive, The Law of Husband and Wife in Scotland (4th ed), para 24.028: Common‑law principle that co‑owners benefit from post‑relevant date increases. The court notes this does not compel using current value for decreases; the statutory scheme still pivots on relevant date valuation unless s10(3A) applies.

Synthesis: McMahon harmonizes Sweeney (hypothetical sale logic) with McConnell (no assumption of post‑date efforts by key spouse) by probability‑weighting deferred consideration, and aligns T v T’s pragmatic treatment of contingencies with family‑law valuation realities. Murdoch and Foster inform the choice and deployment of orders (capital sum plus incidental order for a clean break).

The Court’s Legal Reasoning

1) Two‑Stage Valuation for Deferred Consideration at the Relevant Date

Lord Braid sets out a clear two‑stage method where a hypothetical sale at the relevant date would feature deferred consideration:

Determine the consideration a hypothetical willing purchaser and willing seller would agree at the relevant date using accepted valuation methods (here, recurring income and earnings/EBITDA multiples), selecting the lower figure once reasonable adjustments are made.
Adjust for the reality that part of that price would be deferred and contingent. Critically, do not assume the key spouse’s continued post‑date work (McConnell). Instead, assess the likelihood of the deferred portion being realized in light of evidence about client retention, income mix, and the key person’s stated intention not to remain. Apply a fact‑sensitive probability weighting to the deferred component.

Application in McMahon:

Provisional earnings‑based value: £1,777,000 (accepting no corporation tax deduction on a share sale; adjusting directors’ market cost by £90,000, not £180,000; and selecting the lower of the two methods).
Deferred element: 50% of that (£888,500) would likely be subject to an earn‑out over 2–3 years.
Probability weighting: Only 15% of the deferred half would likely be realized, given the defender’s intention not to remain, client behavior, and the income mix. This adds £133,275 to the non‑deferred half, yielding a relevant date value of £1,021,775 (£510,888 per share).

2) Dissipation and Fair Sharing: Restoring the Purser’s Position

On the facts, the defender deliberately depressed AWM’s value (switching off fees en masse; failing to appoint a locum; moving clients to cash without advice trails; steps towards transitioning clients to a new vehicle; and selective, half‑truth reporting to the FCA). This is both:

A “special circumstance” under s10(6)(c) (destruction, dissipation, alienation), and
Conduct under s11(7)(a) that adversely affected the financial resources relevant to the court’s decision.

Consequence: Whether one starts from relevant date or current value, fairness requires restoring the pursuer to the position she would have held absent deliberate dissipation. Lord Braid shows two doctrinal routes to the same result:

Route A (relevant date start): No adjustment away from relevant date value; divide fairly.
Route B (current value start): Use special circumstances to recalibrate the division to reflect the lost value caused by the defender’s conduct (i.e., “top up” to relevant date value).

This dual‑route analysis is important: it ensures the court can achieve a fair, restorative outcome whichever valuation date is technically engaged, and avoids the loss being borne by the innocent spouse.

3) Incidental Order vs s10(3A): The Valuation-Date “Anomaly” and a Pragmatic Resolution

The pursuer sought a capital sum plus an incidental order under s14(2)(k) compelling her to transfer her share to the defender, rather than a direct transfer under s8(1)(aa). Strictly, s10(3A)’s “appropriate valuation date” wording applies to s8(1)(aa) transfers. Lord Braid flags the anomaly that the valuation date might differ depending on which mechanism is used, and suggests Parliament likely did not intend such divergence. Without deciding the statutory construction point definitively (submissions were limited), the court demonstrates that, in any event, the s9/s10 fairness apparatus (including s10(6)(c) and s11(7)(a)) can neutralize the anomaly by restoring value where one party has deliberately depressed it. That pragmatic approach makes the valuation‑date debate practically moot in dissipation cases.

4) Other Key Reasoning Points

Corporation tax should not be deducted in a share valuation based on recurring income (no asset sale assumed).
Selecting the lower of recurring income and earnings valuations is acceptable to avoid overstatement; mid‑point averaging is not mandatory and may be inappropriate if the two figures diverge or if underlying assumptions differ.
“Members’ voluntary liquidation” was rejected as a cumbersome and unfair route (Foster), especially where it would burden the innocent spouse with process costs and obstruct restorative adjustments.
The matrimonial home remained with the pursuer given stability for children, historic caregiving roles, and the defender’s greater capacity to rebuild wealth; a capital equalization achieved fairness.

Impact and Practical Implications

1) New Precedential Guidance: The “McMahon Two‑Stage” for Deferred Consideration

McMahon is likely to be cited for the proposition that, when valuing a business at the relevant date where a sale would include deferred/contingent consideration:

Courts should identify the headline price using standard valuation methods;
Then probability‑weight the deferred element in light of credible evidence (including whether a key spouse would continue after the relevant date) to avoid illegitimately importing post‑separation effort into the value.

This brings clarity to a recurring problem in share valuations for IFAs, professional practices, and other goodwill‑heavy businesses.

2) Dissipation Doctrine Strengthened

Switching off recurring income wholesale, failing to appoint a locum, moving clients into cash without advice or audit trails, and steps to novate clients to a new entity will be scrutinized as potential dissipation.
The court is willing to restore value to the innocent spouse—either by anchoring to relevant date value or by unequal division if working from current value.
Conduct impacting resources (s11(7)(a)) is live: telling half‑truths to regulators, disabling the co‑director’s access, and opportunistic withdrawals in breach or near‑breach of interdict will weigh heavily.

3) Valuation Practice for Experts

Do not deduct corporation tax on recurring income methods for share sales absent asset disposal assumptions.
Be explicit about the market cost of replacement directors/personnel and justify adjustments; courts may “split the difference” if both sides are plausible.
Model deferred consideration explicitly with scenarios and probability‑weights, including key‑person attrition risks tied to the matrimonial context.

4) Litigation Strategy for Practitioners

Evidence matters: contemporaneous emails, FCA applications, client‑meeting notes, fee switching records, and locum arrangements can decisively establish dissipation or its absence.
Consider using s14 incidental orders for clean‑break outcomes while preserving the court’s flexibility to restore value under s9–s11.
Be cautious about advancing “current value” arguments where the client’s own conduct caused the decline; McMahon shows the court will neutralize such tactics.

Complex Concepts Simplified

Relevant date: The earlier of separation (ceasing to cohabit) or service of the divorce summons. Valuation of matrimonial property is usually fixed at this date.
Current value: The value at or near decree. Under s10(3A), used when the court orders a transfer of property under s8(1)(aa), unless exceptional circumstances justify another date.
Deferred consideration (earn‑out): Part of the sale price paid later and contingent on future performance (e.g., client retention, recurring fees). In family cases, courts should probability‑weight this rather than assume full payment.
Recurring income valuation: For IFAs, valuation often uses a multiple (e.g., 3.5x) of average recurring advisory fees, plus net assets.
Earnings/EBITDA valuation: Applies a multiple (e.g., 6x) to adjusted maintainable profits; adjustments include realistic market remuneration for working directors.
Dissipation: Post‑separation conduct that destroys or alienates value (e.g., switching off fees, stripping cash) can justify unequal division (s10(6)(c)).
Conduct adversely affecting resources: Only conduct that impacts the financial resources relevant to the award may be considered (s11(7)(a)).
Incidental order (s14(2)(k)): Ancillary order to give effect to s9 principles, often used alongside a capital sum to compel transfer of shares without invoking s8(1)(aa).
Interim interdict: Interim injunction. Breaches or cavalier disregard can aggravate findings of dissipation or adverse conduct.

Conclusion

McMahon establishes a pragmatic, principled approach to two deep‑seated problems in financial provision cases involving businesses:

A two‑stage valuation method for the relevant date that realistically handles deferred consideration by probability‑weighting the contingent component, expressly refusing to assume post‑separation labour by the key spouse (McConnell applied).
A coherent fairness solution to dissipation: whether starting from relevant or current value, the court will restore the innocent spouse to the position they would have held but for deliberate value depression, using s10(6)(c) and s11(7)(a) as necessary.

On the facts, the court found deliberate dissipation and made orders effecting a clean break: the pursuer retains the home; the defender acquires the shares (by incidental order) and pays a capital equalization sum. Along the way, Lord Braid clarified the non‑deductibility of corporation tax in recurring‑income share valuations, the cautious approach to directors’ market remuneration, and the limited role of members’ voluntary liquidation in achieving fair sharing (Foster).

The case will resonate in future disputes involving IFAs and other goodwill‑dependent businesses, providing a usable blueprint for experts and courts, and a firm warning against strategic value‑depression post‑separation. In short, McMahon is a significant addition to Scottish family law’s toolkit for fair, reality‑tested business valuations and remedial distribution where one party engineers a decline.