This week, we explore the impact of the coronavirus pandemic on Single Expert Business Valuations in family law property settlements.
Most Australian businesses have been affected in some capacity. It may be cash flow issues, changes to demand or supply chain logistics, or interrupted business operations due to social distancing restrictions.
So, how is this accounted for in a family law property settlement?
What is a Single Expert business valuation?
The Family Court may order a Single Expert to give independent expert evidence in property matters. This order is pursuant to Rule 15.45 of the Family Law Rules 2004.
For business valuations, a “Single Expert” will often be appointed to prepare an independent valuation of the parties’ interest in:
- companies, and
- related entities such as partnerships or trusts.
The role of this Single Expert is to provide a thoroughly researched and definitive opinion of value.
What date is used for a Single Expert business valuation?
A valuation will be as at a specific date. A vague time frame like “after separation” is not appropriate. So many factors can change a valuation from one day, week, month or year to the next. Now, more than ever, we know this to be true.
The date chosen is usually:
- 30 June (the end of the financial year) or
- 31 December (the end of the calendar year).
This will depend on the circumstances at hand and the instructions of the parties. For example, these are common dates for most couples who separated in 2019 and early 2020.
Can a Single Expert consider COVID-19 in these 30 June 2019 and 31 June 2019 valuations?
When assessing the value of an interest, the valuer is only able to consider information that was “known” or “knowable” at the valuation date. For this reason, both of these dates pose a significant challenge for Single Expert valuations:
- On 30 June 2019, the existence of COVID-19 was not known.
The world was completely unaware of the impending COVID-19 outbreak and how drastically different the economic landscape would soon be.
- On 31 December 2019, the reach of COVID-19 was not knowable.
Chinese health authorities reported dozens of cases of pneumonia detected in Wuhan City but the global scale of the soon-to-be pandemic and its economic implications could not have been foreseen.
On this basis, even a valuation as recently February 2020 may not be able to take the economic impact of coronavirus pandemic into account.
Can a Single Expert business valuer just apply a COVID-19 discount to an outdated valuation?
This is unchartered territory.
The COVID-19 outbreak is ever changing. Even though Western Australia medical progress is promising, and the State Government has announced a “cautious relaxation” of restrictions, we cannot say with certainty when the economy will be back on its feet.
Although it may feel like a lifetime, a relatively short period of time has lapsed in which to judge the impact of the pandemic on businesses. Short term volatility may not necessarily be reflective of a permanent decrease in the value of a business. On the flip side, some businesses are experiencing rapid situational growth, such as hand sanitiser production and home delivery services.
Generally speaking, a Single Expert could moderate the effect of pandemic related volatility. They can ensure that a temporary situation (like pandemic) does not disproportionately influence valuations by incorporating longer term profitability forecasts.
However, it is difficult to determine what would accurately constitute a “COVID-19 discount” before the economic situation becomes more stable.
For example, we don’t definitively know:
- How long operation of certain businesses will be restricted;
- The length and breadth of government and bank concessions;
- How much of an adjustment to make for trading and profitability; or
- How much of an adjustment to make for instant asset write offs.
It is difficult to answer these questions with absolute certainty. Therefore it would be difficult to apply a “COVID-19 discount” to any business valuation.
Parties may jointly approach the Single Expert to review any outdated valuations. The Single Expert will then determine whether an updated valuation is necessary.
Can a Single Expert business valuation consider COVID-19 in March or April 2020 valuations?
Yes. Valuations conducted in March and April 2020 can consider the economic impact of any valuations undertaken during the pandemic. However this is only to the extent that such information existed.
In the case of business valuations, it is important to keep in mind:
- the nature of the business and
- the coronavirus pandemic timeline.
From 30 March 2020, the Federal Government closed all outdoor gyms and restricted outdoor group-exercise classes and boot camps. If the parties were to agree on a valuation of a family-owned boot camp business as at 25 March 2020, some four days before the restrictions were announced, the coronavirus pandemic may still be taken into account.
Although the impending restrictions on the business may not have been conclusively known at that date, general social distancing restrictions were increasing in severity across the country and indoor gyms were shut down the week prior – rendering the effective shutdown of the boot camp business and flowing economic impact “knowable”.
Generally, most Single Expert business valuers take the view that if information existed, it can be deemed “knowable”. This includes information not officially compiled – such economic trajectories and government warnings of impending shutdowns.
Should we hold off on instructing a Single Expert for future business valuations?
As a general rule, it is important to seek tailored legal advice that fits your business and personal circumstances.
It may be prudent to commence a valuation once the business has fully recovered from the effect of the pandemic. Granted it is not impossible to conduct a business valuation in these times. However, increased complexity and uncertainty could raise disagreements between parties about the accuracy of “COVID-19 era” valuations.
A delayed valuation may avoid such disputes and the potential cost of updated valuations further down the track.
Conversely, drawn out litigation in the absence of a business valuation can be costly. Therefore it may be in your best interests to push ahead with a business valuation now.