Managing a business during the COVID pandemic is stressful enough, but imagine the extra complexity it adds for business owners who are in the process of divorcing.
As part of divorce proceedings, spouses need to provide full and frank disclosure of their financial circumstances. Whether the financial arrangements arising out of the separation take place within the court process or using an alternative dispute resolution method, each spouse’s assets, liabilities, incomes and anticipated needs will need to be disclosed (on a Form E). In a situation where the valuation of an asset is not known or not agreed, the parties usually appoint an expert (eg accountant) to provide a valuation upon which they, and the court, can rely for the purposes of negotiations.
At present, some experts suggest providing a range of valuations of a business asset for divorce proceedings or a valuation report that covers assumptions made in COVID-19 and non-COVID-19 scenarios.
Of course, while certain industries may be benefiting from the pandemic, the markets generally are down 20-30% and the likelihood is that we have not yet begun to see the full impact of COVID-19 on businesses and inevitably in some cases business failure.
A valuation report usually considers the value of the business as well as its liquidity, its income producing capacity and the tax implications arising out of a sale or extraction of cash. While it depends on the nature of the business, the valuation method usually adopted is one of capitalised earnings. However, discounted cash flow valuations (which may show trading losses being made in the immediate future) could increasingly be used in conjunction with valuations based on earnings or asset bases, given the uncertain climate within which we are all currently operating.
A business owner’s role in the valuation exercise
As part of the financial disclosure process during divorce, a business owner will be expected to provide all relevant financial information regarding their business in their Form E. Not only should owners be transparent with the valuation expert about their predictions for the business and assumptions surrounding future performance and income but any government support received (in terms of loans or furlough assistance) and any anticipated redundancies should also be declared. Information regarding customer or supplier performance or the cancellation of a big contract, for example, could be material and relevant to the valuation and therefore the divorce proceedings.
In terms of documentation, business owners will need to provide:
- management accounts;
- forecasts;
- copies of any government loan applications;
- recent sales and profit figures;
- order books; and
- minutes of board meetings in which COVID-19 and its impact has been discussed.
Communication between business owners, their solicitors and the valuer will be more important than ever so that up to date information is provided regarding the impact of COVID-19 and the business’s plans to mitigate it.
Protecting the business
Another consideration is that business owners now, more than ever, are likely to want to retain cash in the company especially where income has slowed or cash flow may be under pressure. Lawyers and any experts involved will be able to advise on the best way to proceed in terms of any financial settlement and balancing the needs of all stakeholders.
The parties may decide, for example, to pause negotiations or adjourn court proceedings to give time for the economy to settle in the hope that the position for the company will be clearer and given the difficulties of reaching an agreement whilst so many factors are uncertain. On the other hand it may be in a business owner’s interest for financial proceedings to take place now while an asset value is particularly low.
Creative solutions
Spouses may also want to think creatively about financial settlement alternatives. For instance, they may agree:
- to defer lump sums payable to the non business owning spouse and for the figures to be based on future performance;
- for any lump sum to be payable in instalments as this will allow for the possibility of variation if needed and could help manage risk;
- that a spouse should instead retain or acquire an interest in the business to share the risk; or
- to share assets in a different way to that which a court would normally order in order to take account of the uncertain climate and the particular concerns of each party.
These and other available options will depend on the couple’s respective views, particular needs and the facts of the case and so careful thought will need to be given with the help of specialist legal and financial advice.
Conclusion
If business owners are contemplating or going through a separation at this time, as with all assets, it is likely to be difficult to provide an accurate valuation of the business in the current climate. More information than usual will be required to enable a valuation to be undertaken and couples may need to be creative about their settlement options to achieve a financial outcome that is fair to all parties.
