The impact of COVID-19 and the pandemic has severely affected businesses. This has also caused great uncertainty in valuing businesses for the purposes of reaching a financial settlement.
During financial remedy proceedings, both parties are required to provide full and frank disclosure of their financial circumstances by way of completing a Form E. The financial statement will detail each of the parties’ assets, liabilities, incomes and anticipated future needs.
If a party owns a business, it may be necessary to value to the business if the valuation is unknown or disputed by the other party. This is usually done by appointing a single joint expert, usually an accountant, to produce a valuation report on the business. There are several methods for valuing a business and an expert will apply the most appropriate method to the business in question. The expert will usually be instructed to produce a report detailing the value of a business, it’s liquidity, its income producing capacity and the tax implications arising out of a sale or extraction of cash.
The effects of COVID-19 and the pandemic have been detrimental on the economy and this has greatly impacted the value of businesses. It is likely that business owners will want to retain cash in the company whilst the business is going through a slow period. Therefore, an expert should provide a range of valuation reports taking into account both the current situation and also the hypothetical situation if the was no pandemic.
Not all businesses have been adversely affected by the pandemic. In fact, some businesses have seen rapid growth, especially food delivery companies. In that case, the non-business owning party may be in a more favourable position if the value of the business is higher than it would have been pre-pandemic.
The timing of issuing a financial application is crucial. It would be beneficially for a party to issue proceeding now and have the business valued if:
- They are a non-business owning party and their spouse has a business which is very successful due to the pandemic, or
- They are a business owning party and their business has been adversely affected by the pandemic.
To reach a successful settlement during the pandemic, it will depend on the ability of both parties to accept that the valuation of the business today is likely to be much lower than pre-pandemic.
If it is difficult to accurately assess the value of a business, the parties which wish to explore alternative solutions to reach a financial settlement, such as:
- Postpone payment of any lump sum in order to allow time for the business to recover
- Distribute other assets that are available differently between the parties to account for the exclusion of the business
- The non-business owning acquiring a share of the business
For more information about divorce, please contact a member of our specialist divorce law team.
