The impact of COVID-19 on business valuations in family law
By Amy Bush & Jessica Saidel
In family law proceedings, business valuations are typically prepared by a forensic accountant. The accountant determines the appropriate valuation methodology to use, having regard to the nature, size, income, structure, and assets and liabilities of the business.
The purpose of undertaking a business valuation in the family law context is to put a monetary value on a business which, in turn, is taken into account when considering what adjustment, if any, should be made to the parties’ property interests.
The impact of COVID-19
The COVID-19 pandemic has had an unprecedented impact upon society and the economy, radically changing the way we live and work in a very short space of time.
When conducting a valuation of a business, one of the primary considerations of the forensic accountant is the business’s earnings or income. Many businesses are currently experiencing, or have experienced, a substantial fall in revenue or have ceased trading altogether and uncertainty about the future is exceptionally high. On the other hand, some businesses have experienced a significant increase in revenue, which may not be consistent with future earnings. As a result, assessing business value has become more difficult and uncertain. Notwithstanding this, business valuations are still being undertaken, with some accounting experts now advocating the use of particular valuation methodologies which may more appropriately assess business value during COVID-19.
Simply because business valuations can be completed during COVID-19 does not necessarily mean that it is in the interests of the parties for that to occur. It may be risky or disadvantageous to rely upon a business valuation prepared in the current climate to settle a dispute over property. Obtaining a business valuation may also generate doubt as to its accuracy, which may necessitate questions being put to the valuer, the expense of adversarial experts or having a further valuation completed at a later stage.
Considerations should also be given to the approach of the courts during COVID-19. While some property matters are being heard via telephone or videoconferencing, the courts have also adjourned the final hearing of some non-urgent property-only matters until later this year, in order to accommodate more urgent matters. Parties may wish to consider whether it is appropriate to seek an adjournment of a final hearing of a property matter due to the current uncertainty surrounding the valuation of a business and other assets.
Fluctuating market forces are not a novel concept considered by the courts. In 2008 the family law courts were faced with the global financial crisis (GFC) and the impact of this upon the value of assets, including businesses. In Sadler & Sadler [2009] FamCA 447, the court made final property orders after inviting the parties to make further submissions in relation to one party’s superannuation interest, as a result of media reports regarding the impact of the GFC on the value of superannuation.
The overriding principle of the Family Law Act 1975 (Cth) is to ensure any adjustment of the assets of the parties is “just and equitable”. Without having a reliable value attributed to a business, can the court be confident the settlement is just and equitable?
What is the best approach for you?
The family law courts are actively working to minimise disruption, and court proceedings are continuing, including in financial matters, notwithstanding the uncertainty. However, every case is unique and there is no “one-size-fits-all” approach that should be adopted. Lawyers are tasked with the responsibility of tailoring their approach to each individual matter to ensure their client’s interests are protected. As the COVID-19 pandemic and its aftermath continues, Kennedy Partners will continue to develop strategies and monitor outcomes to manage valuation issues that might arise from the crisis.