Family law partner, Justine Flack discusses how family businesses may be valued in the wake of coronavirus and why it may be necessary to take a broader view in terms of the short, medium and long term impact on valuations.
We are all starting to see an easing of restrictions and the focus is now on economic recovery with the green light being given for more businesses to become operative. This is positive for employees and employers alike although for many there is cautious optimism and others are still unable to commence work just yet. With life still far from what we would regard as normal, how does the situation affect the divorce settlement where there is a private company or a family business?
Pre coronavirus the existence of a business could present challenges to structuring a fair settlement. Firstly there was the issue of the value of the business or a party's shareholding. Secondly was the consideration of the liquidity of the asset. Finally it was the matter of risk; shares in a business are not considered 'copper bottomed' like land or bank accounts.
Valuation is often described as an art not a science. There are various methods for valuing a business and an expert accountant will apply the most appropriate method to the business in question. Often it will involve looking at profits for the last three years. Will it now be viable to base value on that? Will historic performance be a reasonable guide for the future?
We have experienced recession in the past, most recently 2008. The family courts were inclined to view that as part of an expected economic cycle. Can Covid-19, a global pandemic which has caused complete shutdown to many aspects of life and particularly to certain businesses, be viewed in the same way?
Accountants are very clear that the impact on businesses and how they will be viewed in a valuation exercise will be sector specific. Some businesses have fared well in this crisis - food production and delivery, others have managed to keep trading - professional services, some have stopped trading - pubs, restaurants and hotels. Recovery will depend on how soon normality is restored, how the business may adapt and how readily the supply chain adjusts and mobilises.
One accountant was clear, that any valuation has to be meaningful. That has to be right. Historic information will still be relevant; how well run was the business, does it have a good trading record, did it operate with cash reserves. There may be more focus on an asset based valuation for some businesses rather than trading. Confidence in the business may be a factor; how did it respond to the crisis to protect itself, has it been granted a loan to assist it to trade through this.
A broader view may need to be taken; the short-term situation may look terrible, medium term could suggest stability with recovery being seen in the long term. The valuation provides a tool for realistic discussions about settlement. That may involve some creative solutions to ensure that the risk is spread fairly. There may be more thought to shares being granted to one party (or retained by them) where otherwise they would have no interest in the business after the divorce. A structured buy out may be put in place dependent on certain conditions being met which make it viable. Maintenance may have to be accepted rather than capitalisation at this point. A clean break may simply not be fair or achievable if there is pressure on resources.
We don't deal with assets in isolation and the business has to be viewed as one of all of the assets. Where it makes up a small element of the asset pot the impact of a change in its value may be less relevant. In other cases it will be a significant factor. There may also be merit in taking time to assess matters; wait and see how things progress now that we are starting on the road to recovery. With delays to court proceedings there may be no choice with this. We can't assume a business will either fail or survive because we haven't had to deal with a situation like this before.
What is important is that expert advice is sought. This should always have been the approach but it is more important now than ever. A realistic view has to be taken; one accountant suggested that there is a risk of being too pessimistic. An accountant can guide on value which might include reviewing a valuation obtained late in 2019 or early in 2020. The solicitor needs to think creatively as to how fairness might be achieved. Together they should be able to work on a practical solution.
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