With the downturn in business and, in some cases, the impossibility to even do business, the question, from a divorce standpoint, becomes, “What is the value of our business now?” This question only raises a large number of other questions, as you will see when reading this. Note, there are no “answers” here and this is generally, a set of notes about the issues raised by our current situation here the United States.
Keep in mind that the valuation of a business must be as of the date of the valuation. What if we are valuing a business today, in this Covid-19 environment? There have, in the past, been short downturns in business, in general, for instance after 9-11 or in the 2008-2009 downturn, but these were much less intense than what we are going through now. The whole country was not shut down after 9-11 or even after the 2008-2009 downturn.
Business valuation is done based on income, cash flows, and discounted cash flows. In family law, cash flow is one of the most important indicators of value. Discounted cash flows are predictions of future cash flow but how is “cash flow” currently being affected though, as a result of Government grants and loans to people? How long will the cash being passed out now last—especially for those who no longer have employment? What about those who are workers here in the country but who are not receiving even the present grants or loans? How can any sort of cash flow be predicted?
Of course, “the future” is important in valuation. However, who could even pretend to be able to predict the future as of now? What happens in cases where the valuation was done last year but the case has not gone to trial yet? What do you do with last year’s valuations if there is no de facto termination date which has been set for the past (when the Court decides to value assets and debts as of a past date—deciding the marriage was technically over then)? On the other hand, what about businesses that are doing excellently now (only because of the Corona virus) but will most likely not do well after the current situation is over? How do you look at cash flow with those and “predict the future earnings?”
When an “asset” or “market approach” is used for valuation, we are looking at “prior sales” of like businesses. If so, a new question may be “how far prior?” Another question—“How does anyone know how to “adjust” those prior sales and on what “standard” are they basing adjustments (since there are most assuredly no standards due to the fact that we haven’t been through all of this before)? Look at the figures from the “Great Depression” in the United States and how long it took to get from the “beginning of that” to the lowest point, economically. I believe it was about four years. This “Covid thing” may just be starting. What a business was worth last year (one of the “top” years in the United States, before the virus) probably has nothing to do with what it is worth now.
Asset approaches look at asset values, less “liabilities” but aren’t liabilities increasing every day with lack of production, non-payment of rent and other ongoing costs which are produce essentially nothing for many businesses?
Most of what has been happening since the arrival of the Corona virus, has never even been thought of or actually anticipated. What does all this mean? When will a recovery occur? How much will S.B.A. loans impact value? How much will other distributions from the government—thus adding to “cash on hand” for consumers, effect everything. Will there be more money coming from our Government or is this it? How will the government’s passing out of all this money affect future taxes if the government has to re-coup the money to help balance the budget?
The disaster loans ($15,000 now) have been around forever and were not created for this Covid virus situation. The grant potion of these loans is much less than what was originally announced.
The PPP loan is based upon 2.5 times your average payroll, as a business owner. There is a limit on the total available for all applicants. Over a million applications have already been received. There are rules on how the money can be used, but, in certain circumstances, the money will not have to be paid back. Commercial banks can help with processing of loan applications. Mortgage, utility, rent and payroll may be paid out of these loans.
From a domestic relations standpoint, if someone is attempting to value a business currently, or if a past valuation is offered in a case occurring now or yet to occur, the questions we have set forth here would all be relevant for cross examination of any expert advocating a present or past valuation.
If you are in a case now and business valuation is one of the issues, you should make sure that you have an attorney who is aware of these issues and who can effectively speak with your expert about these issues, effectively prepare your expert testimony in light of these issues, and effectively cross examine any opposing expert.