Business owners grappling with the challenges of Covid-19 will find their situation further complicated if they are also going through a divorce, because of the financial disclosure requirements of that process.
As a part of the proceedings, parties need to provide full and frank financial disclosure. This includes, but is not limited to, each spouse’s assets, liabilities, income and anticipated needs. Parties will commonly complete a Form E, Financial Statement, either on a voluntary basis or through court proceedings. When it comes to a business, parties are able to agree a value of the business using an expert, such as an accountant, who is familiar with the matter.
Unfortunately, disagreements over that valuation are common, especially when one owner is massively undervaluing the business, a business partner is not being co-operative or a business is being over-valued against real figures. In situations such as these, it would be appropriate for parties to instruct a single joint expert to provide a valuation which they and, if necessary, a court can rely on for the purposes of negotiations.
It is now becoming a matter of course for parties to obtain valuations of a business asset for divorce proceedings or a valuation report that covers assumptions made in Covid-19 and non Covid-19 scenarios.
This is because, while some businesses may be benefiting greatly from the pandemic, markets are generally down circa 20% to 30%, and it is likely that we have not yet seen the full impact of Covid-19 on businesses.
A valuation report would normally consider the value of a business as well as the liquid capital that is available. Other considerations when valuing a business include:
- Income producing capacity
- Tax implications from a sale
- Tax implications for the purposes of extracting capital.
All of these factors will vary depending on the nature and strength of the business.
Discounted cash flow valuations, which will show trading losses being made due to the current pandemic, could increasingly be used in conjunction with valuations based on an earnings or assets basis, given the current climate.
What do business owners need to do within the valuation exercise?
Firstly, it is vital to provide all the relevant information requested on Form E, but it is also important to ensure that there is relevant disclosure surrounding future performance and income. Any government support received, such as terms of loans or furlough assistance, and any anticipated redundancies, should also be declared. Due to the unusual set of circumstances, information regarding customer or supplier performance or the cancellation of a big contract, for example, may be important to the valuation and, therefore, the divorce proceedings.
Business owners may also be asked to provide:
- Management accounts forecasts
- Copies of any Government loan applications
- Details of recent sales and profit figures
- Order books
- Minutes of meetings (during Covid-19).
How do I protect my business?
Most businesses will want to retain as much capital as possible, especially where income has slowed down or cash flow may be under pressure. It is always best to take advice on how best to proceed in terms of any financial settlement whilst balancing the needs of all stakeholders involved.
The parties involved can pause negotiations or adjourn court proceedings until the economy has settled, when the position of the company may be clearer and there is less uncertainty. Alternatively, it may be in a party’s interest for financial proceedings to take place now whilst an asset has a low value; that makes it possible to purchase the other party’s interest at a lower than usual rate with a view to then selling and upscaling the business in future with greater profit.
Alternatives within financial settlement
There are a number of solutions that parties can agree to within the context of financial settlement, including:
- Deferring a lump sum payable to the non-business owning spouse and for the figures to be based on future performance
- Requiring a lump sum to be paid in instalments, which will then allow the possibility of variation if needed and could help manage risk
- Having a spouse retain, or acquire, an interest in the business to share the risk
- Arranging to share assets in a different way (by way of an offset), to take into account an uncertain climate and the particular concerns of each party.
If you are contemplating, or going through a separation, now, it is likely to be difficult to provide an accurate evaluation for a business unless such a business is actually available for sale (similar to all assets).