My financial circumstances have changed since COVID-19 – can I vary the spousal maintenance I pay?
As part of divorce proceedings, both spouses will need to provide full and frank disclosure of their financial circumstances. Whether the financial arrangements arising out of the separation take place within the court process or using an alternative dispute resolution method, the disclosure usually takes place on a document called a Form E. The Form E records each spouse’s assets, liabilities, incomes and anticipated needs. In circumstances where the valuation of an asset is not known or not agreed, it is common for the parties to appoint an expert (usually an accountant) to provide a valuation upon which they, and the court, can rely for the purposes of negotiations.
We regularly act for business owners in divorce proceedings and an expert is commonly appointed to help with the valuation exercise. The effects of COVID-19 on the economy will have an impact on the business valuation process and could mean that the expert will need to provide a range of valuations or that valuation reports cover assumptions made in COVID-19 and non-COVID-19 scenarios.
It seems that all businesses are being impacted by the pandemic and while certain industries may be benefiting, reports show that the markets generally are down 20-30%. Some experts have said that we have not yet begun to see the full impact of business failures and this may become more evident in the months to come. If business owners or their partners are contemplating or going through a separation at this time, it is important that they seek legal advice about the impact the pandemic could have on their case. It is likely that additional information will be required to enable a valuation to be undertaken and couples may need to be creative about their settlement options.
As part of any divorce or dissolution process, experts are usually instructed to prepare a report considering the value of a business, its liquidity, its income producing capacity and the tax implications arising out of a sale or extraction of cash. While it depends on the nature of the business, in our experience, the valuation method often adopted by experts is one of capitalised earnings, which essentially assesses the future income of a business and is something an independent purchaser would be interested in.
While experts have advised that the valuation methodologies used for valuations in the COVID-19 era are unlikely to change, the assumptions and information considered as part of their analysis may have to. We have also been told that other valuation methodologies, such as discounted cash flow valuations (which may show trading losses being made in the immediate future) could be used in conjunction with valuations based on earnings or asset bases, given the uncertain climate within which we are all currently operating.
As referred to above, one of the valuation methodologies often adopted by experts is based on a business’s maintainable earnings using its EBITDA or earnings before interest, taxes, depreciation and amortisation. As part of the financial disclosure process, a business owner will be expected to provide all relevant financial information regarding their business in their Form E. When an expert is appointed, the business owner will also likely need to speak to the valuer so that they can gain a better understanding of the company, its clients, its past performance and future predicted profitability. As a partner of a business owner who may understandably be concerned about the neutrality of the information being provided, it may be necessary to ask the expert to provide a note of discussions had with the other party or to confirm the extent to which their input impacted on the valuation.
As with all assets, it is likely to be difficult to provide an accurate valuation of a business in the current climate. Nobody knows what the full impact of COVID-19 will be on the economy nor how long recovery will take. Many business owners will be applying for government loans, taking advantage of furlough schemes and considering with their finance teams or accountants what steps should be taken to protect the business during this unprecedented time. Business owners are going to have to be open with the expert about the impact on their business and assumptions surrounding future performance, income, government support and any anticipated redundancies.
In terms of documentation, business owners will need to provide:
Communication between business owners, their solicitors and the valuer will be more important than ever so that up to date information is provided regarding the impact of COVID-19 and the business’s plans to mitigate it, key customers, suppliers, anticipated future income and cancellation of existing contracts so that the impact of this can be assessed in terms of the valuation and the relevance to the financial proceedings.
It is almost certain that COVID-19 will have an impact on the business valuation process in one way or another and clients, expert valuers, solicitors and the family courts will have to do the best they can with the information available. It seems likely that concerns about a business’s profitability during COVID-19 will impact any valuation as will the provision of government loans which impacts a business’s debt position. Business owners are also likely to want to retain cash in the company while income has slowed or ceased which could impact on liquidity. In each case, therefore, solicitors are likely to need to ask the expert how the impact of COVID-19 has been considered as part of any valuation and how and why particular variables were adopted.
There is unlikely to be one right answer and every case will need to be considered on a fact specific basis. It is therefore important that, if you are going through a separation, you speak to your solicitor and any experts involved about the best way to proceed. Any valuer should be assessing the short and medium term impacts caused by coronavirus and parties may decide to pause negotiations or adjourn court proceedings to give time for the economy to settle in the hope that the position for the company will be clearer.
It should also be borne in mind, however, that it may be in one spouse’s interest for financial proceedings to take place now while an asset value is particularly low. For those already in court proceedings, while there will be some delay while the courts process the backlog of cases, prioritise urgent cases and manage remote hearings, valuations may still be ordered and cases heard. Experts may be asked to provide updates on valuations already undertaken or to provide a COVID-19 valuation and a valuation based on more historic data which places much less weight on the current climate so that the parties and the court have a background against which to consider the current valuation. In either case, this could increase costs as it will be inherently difficult to reach an agreement while so many factors remain uncertain.
Finally, spouses may want to think creatively about a financial settlement and how the current economic uncertainty can be managed. For instance, they may agree:
These and other available options will depend on the couple’s respective views, particular needs and the facts of the case and so careful thought will need to be given with the help of specialist legal and financial advice.
An adapted version of this blog was also published by Business Matters on 20 May 2020 - Valuing your business for divorce proceedings during the uncertainty of COVID.
You may be interested in reading our other blogs in this series about changes in financial circumstances as a result of the coronavirus crisis and its impact on divorce settlements and maintenance:
If you concerned about the impacts of COVID-19 on the valuation of your business on divorce and you would like advice on how to best proceed, please contact a member of our team.
Please note that the general guidance provided within this blog is accurate at the time of writing (12 May 2020). It does not constitute legal advice and specialist advice should be sought in individual circumstances.
Connie Atkinson is a Senior Associate in the family team and has experience of dealing with all aspects of private family work relating to both finances and children. Connie has expertise in cases involving: financial settlements; partnership, company and/or trust assets; international elements such as relocation and cross-border disputes; international surrogacy; arrangements for children; pre and post nuptial agreements. Connie is a qualified mediator and assists as a mediator for clients in respect of all practical and legal issues surrounding family arrangements and divorce.
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