It is well reported that the commercial world has been affected by the pandemic and the medium to long term impact is yet to be measured. For some business owners going through a divorce, the pandemic could be seen as an opportunity to downplay the capital value of the business or the income it produces.
How a business is valued in divorce proceedings depends on the type of business but the most common approach to valuation is one based on its future maintainable income. Past, present and forecasted trading figures are used to provide a capital value for the business. If the value of a business cannot be agreed, it is usual for a divorcing couple to jointly instruct an accountant to provide a valuation. In addition to being instructed to provide a value for the business, the accountant is usually asked to report on the liquidity of the business to explore if it is possible to extract cash from the business to pay a lump sum to a spouse and to look into what is a reasonable level of income the business can pay to its owners/shareholders to assess maintenance payments.
As a result of the economic instability caused by the pandemic, experts are being asked to prepare reports based on pre and post pandemic performance. Discounts on values are being applied to take into account loss of future profitability even if current trading figures are not yet showing a loss. It’s an opportunity for the business owning spouse to negotiate a settlement or to ask the court to order a settlement if negotiations fail. An owner may argue that cash held in the business that would otherwise be available to fund a lump sum is required as a financial buffer during uncertain times. Drawings or dividend payments might be depressed with the owner arguing that cash needs to be preserved in the business. The use of government grants to support the business will have increased the debt position within the business.
The non-owning spouse will be looking to slow down the settlement process so that an accountant has a longer overview of the performance of the business to measure the extent to which it is impacted by the pandemic. However, with the economy still in a state of flux, experts and the courts are likely to continue to take a cautious approach to valuation to the potential detriment of the non-owning spouse who, more often than not, is the wife. To ensure fairness between a divorcing couple, the court may have to adopt a more creative approach to settlements that may involve keeping a wife’s lump sum claim open to give her an opportunity to monitor the business and to come back to court later on for the court to assess a lump sum award or they may decide that it’s only fair for both the husband and wife to take the risk/benefit of future loss/profitability and award the wife shares in the business or to retain her shares. An outcome will require careful consideration with the help of specialist legal and accountancy advice.