What Will Impact My Business Valuation?
1. Valuation Date
In a divorce, two valuation dates must be used by valuation experts. The first is the valuation as of the date of marriage. This date would not apply if the business interest was begun or acquired during the marriage. In Pennsylvania, the second is the valuation as of the date of separation.
When valuing a business interest, the valuation expert can only consider information which was known or knowable as of the valuation date.
Date of separation was on or before January 31, 2020
In the current COVID-19 pandemic environment, the valuation community generally agrees that if the date of separation was on or before January 31, 2020, the impact of the COVID-19 pandemic was generally not known or knowable at that time.
Date of separation was between February 1, 2020 and early March 2020
Many valuation experts believe that if the date of separation was between February 1, 2020 and early March 2020, the impact of the COVID-19 pandemic was also generally not known or knowable at that time.
Date of separation was after about March 10, 2020
Valuation experts generally agree that if the date of separation was after about March 10, 2020, the impact of the COVID-19 pandemic was generally known or knowable. This means that only values determined after about March 10, 2020 can consider the impact of the COVID-19 pandemic.
However, in Pennsylvania, a third valuation date could apply. This would be for situations for which the business interest had declined in value after the date of separation but before the date of the marital separation agreement (MSA). It is likely that this third valuation date will apply to a number of Pennsylvania divorces which had not been completed prior to the COVID-19 pandemic.
2. The Industry of the Business Interest(s)
While many businesses and industries have experienced significant impact from the COVID-19 pandemic, others have experienced little, if any, impact. Hence, it is important to consider the industry and specific circumstances of each business interest. For example, if the business interest owned is a gym, bar, hair salon, motel/hotel, travel-related business, gas station, retail bookstore or other business deemed as non-essential, it is likely that the business experienced a significant decline in revenues (or had no revenue at all) in late March, April and May 2020. However, other businesses such as grocery stores, restaurants whose business is primarily take-out, PPE manufacturers, residential home improvements contractors, landscaping businesses, etc. may have experienced little if any decline in revenues (or even an increase in revenues).
Impact of COVID-19 on Business Income Used to Value the Business Interest
Most small-sized and many medium-sized businesses do not keep budgets and forward looking financial projections. These companies are likely to find it difficult to suddenly create these budgets and forward looking financial projections which are necessary to determine the impact of the COVID-19 pandemic. Many such businesses also do not have experienced outside accountants who can help them with this creation. Additionally, business valuation experts are prohibited from creating these budgets and forward looking financial projections as part of their valuations since doing so is a conflict of interest. This is likely to mean that these businesses would have to engage expensive consultants to help them create the budgets and forward looking financial projections.
As a result, these businesses are unlikely to spend the money necessary to create the budgets and forward looking financial projections. In such cases, the valuations of these businesses are likely to have to use historical operating results as the basis for their valuations. However, this historical information will not take into effect the COVID-19 pandemic. If no budgets and forward looking financial projections are available, then the only way to adjust for the COVID-19 pandemic is to adjust the risk factors and expected long-term growth rates used to capitalize the earnings.
Because of the problems noted above, there may be considerable differences in the valuations arrived at by each spouse’s valuation experts.
Collaborative Divorce Can Help
Because valuation of business interests in a traditional divorce usually requires each spouse to hire his/her own valuation expert, and because opinions of value from these experts may materially differ, considerable cost and time may be expended for valuation reports, rebuttal reports, depositions, testimony and cross-examination. For the reasons cited above, the COVID-19 pandemic may cause an increase in such costs. Additionally, after everything is said and done, the courts will ultimately determine the value of each business interest to be used for equitable distribution.
However, in a collaborative divorce, there is only one collaboratively trained business valuation expert. The expert is neutral with regards to each spouse, and works openly and as part of a team with the spouses and their collaboratively trained attorneys in determining an acceptable business value to be used for equitable distribution. There is no need for depositions, testimony or cross-examination, and the couple themselves make the decisions instead of the courts. This can, of course, save the couple considerable time as well as financial and emotional cost.
About David Anderson, CPA, CFE, CVA
David Anderson, CPA, CFE, CVA is a forensic accountant and collaborative business valuation expert serving divorce lawyers and their clients in Bucks County, Chester County, Delaware County, Montgomery County and Philadelphia County. He provides a full range of divorce-related business valuation and forensic accounting services including forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support services, economic damage analysis, business consulting and outsourced CFO services. Anderson has more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst. Anderson also has provided expert witness testimony in the Greater Philadelphia area, and served as a forensic consultant and business valuation expert on both civil and criminal cases.
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