The coronavirus pandemic has had a dramatic effect on many businesses, the majority to their detriment. One thing is sure. The value of most businesses, recently, has not remained static.
Have all businesses dropped in value as a result of the pandemic?
Because of lockdowns, many online retailers have reported a surge in business, and especially those offering food delivery services. For supermarkets, that has been a boon. However, for restaurants and fast-food outlets, the home delivery service has enabled them to survive, but only just, as customers who eat in also contribute to revenue. Delivery services like Deliveroo, Just Eat, and Uber Eats have embraced the restrictions the pandemic has created.
Of course, there are associated businesses that have also done well as a consequence of others’ success. In the early days of the pandemic, there was a related wave of panic buying which saw supermarket shelves emptied within hours of being restocked. Food suppliers and manufacturers of items such as toilet rolls struggled to cope with the massive increase in demand.
Businesses hardest hit by the pandemic.
There is then the other side of the coin. With shutdowns and general restrictions to the way we are allowed to socialise or engage with others, public houses, hairdressing salons, gyms, tattoo parlours and many other businesses had to shut their doors overnight. While pubs and restaurants are now allowed to take customers and close early, the rules regarding social distancing mean most can only operate at 25% capacity or less.
As rules are relaxed, or in other cases reinstated, the value of numerous businesses changes almost from day to day. So, how do you assess the current value of a company in today’s volatile climate? The only way is to call in an expert. Someone who has experience of volatile markets and who can gather all the current information, plus assess prospects, and then arrive at a carefully calculated figure.
Why might a business valuation be needed today?
So, why might it be essential to have an accurate idea of the value of a business today? Those caught up in the current volatile market include couples who are getting divorced. As part of the divorce proceedings, each party has to make full disclosure of their financial situation, including all assets and liabilities. Based on these figures, if both parties cannot agree on an acceptable division of assets, then a judge will intercede.
What must you provide for a business valuation?
The business valuer may be employed by one or other party in the divorce, but their valuation should be fair and accurate. It is not unusual, though, for each party to appoint their valuer to avoid any sense of bias. There will need to be a discussion with the business owner on the business profile, past, present and future performance. In the climate of COVI-19, projecting future profit or loss is not easy as there is no historical data on which to make sound projections.
With many businesses applying for or receiving government loans, many staff on furlough or potential rounds of redundancies on the horizon, all these can have a significant impact on a business’ valuation. When providing information, the business owner will need to complete Form E, which will provide all the necessary details. The owner must provide:
- Certified accounts
- Business forecasts
- Copies of any government loan applications/receipts
- Recent trading figures in the form of sales and purchases
- Details of all recent, current and future orders
- Minutes of any board meetings where COVID-19 and its effect on the business has been discussed
If COVID-19 has been responsible for a drop in sales, the business value will fall. If the business has or is in the process of obtaining a government loan, that will increase the level of debt and negatively impact the value.
When it comes to agreeing on a value, expert valuers will be expected to provide details of how the pandemic has specifically affected the business; and what, if any, variables have been included in the business valuation.
It is possible to suspend the current business valuation.
Because the valuation of a business is currently so subjective, your business solicitor may recommend pausing the valuation until the economy stabilises and the road to providing an accurate valuation becomes clearer. On the flip-side, having a low valuation may be an advantage to one of the parties, so they pay press for an early court hearing if no agreement is reached on the distribution of assets.
What is the alternative?
When it is difficult to assess the value of a business accurately, creative thinking could be the solution. Reaching a measured decision on the value of a business would take into account current trading, pre-pandemic trading, and the likelihood of the business eventually returning to full profitability. If timing is not critical, then other options will be preferable:
- Postpone payment of any lump sum to allow time for the business to recover, and the value of that lump sum is based on future performance.
- Stage payments of an agreed lump sum that allow for an improved valuation over time
- The spouse receiving the lump sum exchanges a financial settlement for shares/a stake in the business, thus sharing the risk
- Share other assets in a different way to take into account the exclusion of taking a lump sum from the business at a time when cash flow is critical
Action Plan
The key to a successful settlement during the COVID-19 pandemic will depend on the ability of both parties to accept and agree that the valuation of the business today may be considerably lower than it was a year ago. Additionally, there is no guarantee that the business will survive the pandemic if a vaccine is not found and life can get back to ‘normal’ even though it will never be the same.
The best advice is to speak to experts in divorce settlements that involve the distribution of business assets. Here at Qredible.co.uk, our divorce solicitors have many years of experience in this particular filed of divorce law, and we will be happy to have an initial, informal discussion with you if you get in touch.
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