Potentially one of the most complex issues in a divorce is arriving at a fair value of a business owned by a party. With the UK economy in the deepest recession since records began and the end of the Brexit transition period less than 100 days away, uncertainty over the fair value of a business is greatly amplified.
Valuing the business
If you or your partner owns a business and are in the process of separating it is important you seek legal advice at an early stage. It is more important than ever for solicitors to communicate early with a client, the relevant business and the opposing solicitor to identify the relevant disclosure required to assist with a business valuation.
Most valuations are undertaken by an accountant acting as a single joint expert who will provide an objective assessment as to the value of the business. The current economic climate makes the expert's job harder and it may mean a range of valuations are necessary to account for different scenarios, depending on the business.
Before instructing the expert to value a business, it is best to discuss with the expert exactly what information they need and how they can best carry out a valuation which is fair to both parties.
Once the expert is instructed, the valuation methodology for an expert will not change during this time compared with normal, but the assumptions and the information they need to consider will. The most common method is based on a business's maintainable earnings. This relies on past performance with most recent performance being given more weighting and some emphasis placed on reasonably anticipated future projections. The devil will be in the detail with the expert needing full access to up to date company performance data.
Approach to business valuations at this time
Almost every business has been impacted in some way by Covid-19 and/or Brexit, and the expert will therefore have to present a valuation based on variables that are likely to be significantly harder than normal to pin down, particularly in sectors most heavily affected and which are still subject to pandemic restrictions or government financial assistance. Clients, and their solicitors, need to consider the following:
- Ongoing disclosure will be key, particularly with Government restrictions and financial assistance changing. Whilst a valuation can factor these in to an extent, if the Government changes the restrictions or financial assistance on offer then that may change the valuation.
- The need for the expert to liaise directly with directors within the business to understand the impact of the economy. This always causes concerns of impartiality by the partner of the business owner but an experienced expert should not be swayed by attempts to minimise the value.
- Instructing the expert to produce valuations based on a Covid-19 and non-Covid-19 assumptions, or a no deal Brexit assumption. This allows all parties to better understand the extent of the impact of these major events on the business.
- It can be vital for each party to appoint a "shadow accountant" to consider the expert's report and advise from that party's perspective on where a report should be questioned.
- In litigation, there may be a greater use of Daniels v Walker applications, where a party applies to be released from the single joint expert report so they can instead rely on their own appointed expert.
- The pros and cons of delaying the whole process. For example, if the end of the Brexit transition period will have a major impact on a particular business depending on whether or not a deal is reached with the EU, it may be sensible to agree to delay until the outcome of negotiations with the EU is known.
With many businesses failing, a partner with a robust and successful business is bound to use the pandemic and Brexit as reasons to try and undervalue their business for the purposes of the divorce. However, the economic reality will mean that many profitable and lucrative businesses pre-COVID-19 may now be on the verge of insolvency. The most important issue for clients is therefore to be proportionate in their approach and to take expert advice at an early stage to help minimise their costs.