What, in a nutshell, is happening about business valuations now and what should you do if you are negotiating a financial settlement in these uncertain times?
If you were reaching the end of financial negotiations on divorce or separation when COVID-19 hit the UK, it may seem that just as a resolution was in sight, all the pieces have been thrown in the air. Uncertainty over needs, asset and business values, incomes and likely pensions will have cast a shadow over any financial arrangements that were about to be agreed.
In this guest blog Richard Barnett a partner in the corporate and commercial team at Joelson considers what is happening with business valuations now, and what steps you could take to protect yourself if you are agreeing a financial settlement.
Valuations of businesses (whether companies, partnerships or sole traders) are always difficult and the outcome debatable. Unfortunately the impact of COVID-19 makes the position more so.
A valuer now will probably have no other sales of similar businesses post COVID-19 with which to compare your business. He or she will probably need to undertake two valuations; one just before the lockdown, which would be a valuation at full value as a trading business, and the other valuation being during/post-COVID-19 and taking into account COVID’s impact. The “business as usual” valuation will be relatively easy; the “COVID” valuation will be much harder.
One party to the negotiations may argue that the valuation should be delayed; the other may wish to rush it through. The “business as usual” valuation is therefore a sensible base line and can be prepared either now or at a later date, if valuations are delayed.
Everyone involved will want to see what is happening now with sales, supply issues, the impact of COVID-19 on key customers, cancelled contracts, redundancies (as opposed to furloughing) and the forecasts. Any business loan applications that have been made will also be of interest.
It seems for many businesses that the outlook may not be sufficiently clear to value the business for at least 12 months. Even if the business can be valued, the valuer is likely to attach a raft of qualifications to the valuation and/or include a very wide bracket of values. This inhibits any financial settlement and makes a judge’s determination even more uncertain than usual. In particular, a transfer of a share of the business may be a more likely outcome than previously. If parties are locked into such a situation, is there anything else they can consider?
The sector of the business will be very important in terms of its frailty or strength. There are a number of sectors (eg. pharmaceuticals, domestic delivery companies, etc), which are strong now. Valuations could probably proceed with some assumptions about the business after lockdown (although here the argument may be that the upturn is not sustainable post COVID). Other sectors (eg. hospitality) are in trouble and trying to value them now would probably be almost impossible.
The parties could instead consider whether to use the divorce as an opportunity to redistribute the shares held in the business to younger generations. HMRC might well accept a low valuation at this point, which they might not in years to come. There may well be very beneficial tax relief available including business property tax relief which the parties could use too.
In the majority of cases where there are no spare assets to pass on to younger generations, the difficulties of valuation could be sidestepped by the transfer of the shares between the spouses, thus avoiding a valuation. This is always complex but should be considered at the outset within the tax year of separation. It appears that holdover relief is no longer available as the concession on divorce has been withdrawn recently by HMRC so a transfer within the tax year of separation is very valuable. Alternatively, a transfer to a child would still qualify for holdover relief as well as being a PET (potentially exempt transfer) for IHT (Inheritance Tax) purposes.
If you are the spouse of the business owner you may be worried that your spouse could decide to put the business into administration if it is in trouble and then organise a purchase of assets from the administrator in a pre-pack administration. Can you do anything to prevent this? If you are potentially in this situation, it is essential that you take advice as soon as possible in order to protect your interests.
If you are reaching a financial settlement on divorce or separation which involves the valuation of a business now, tread carefully. Ensure that you take expert advice – from corporate lawyers like Richard Barnett, tax specialists and family lawyers like those at Family Law in Partnership – on the valuation issues and on your available options. And try not to get rushed into making decisions quickly before you have had time to assess your options.
Reaching a financial settlement can be a testing time but at Family Law in Partnership we will work by your side to secure a successful outcome. We will advise you on what is fair, reasonable and realistic, whether you are involved in a negotiated settlement or whether a judge is to make the final decision. And we will draw on our many years of experience to help you make informed and well considered choices, both in terms of process and outcome, when reaching a financial settlement. Take a look at our dedicated website page on financial arrangements on divorce and separation here.
Richard Barnett is a partner in the corporate and commercial team at Joelson. He provides advice on a wide range corporate and commercial transactions. His expertise includes mergers and acquisitions, company reorganisations, joint ventures, franchising and working as corporate counsel with owner-managed businesses and professional practices. He also advises on corporate finance.