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We are currently living in turbulent times with the impact of COVID19.  Many businesses have been forced to close, other businesses have scaled down, some have not been impacted and a few are booming.

It is likely that the value of many businesses have changed materially since last year.  So why are you basing your asset pool and determining its allocation on out of date information?

Two of the critical issues for a valuation are (1) the purpose of the valuation and (2) the date of the valuation.

Purpose

In family law the role of the business valuer is to provide an estimate of the value of a business for the purposes of determining its part of the matrimonial asset pool.  Then the parties will either negotiate a settlement or the court will decide on a just and equitable allocation of assets.

Valuation date

The second important issue is the date of a valuation.  Generally, the valuation is date is based on recent financial statements (interim or final).

A valuer can only consider what is known or knowable as the valuation date.  As an example, if I have to value a business for a say a partnership dispute at the date of dispute, then I can generally only consider what is known or knowable as at that date, not what happens in the future.

The implications of this is that valuations at, say, 30 June 2019 can only take into account what is known or knowable at 30 June 2019.  That means I cannot consider the impact of the 2020 bushfires or COVID19. 

If you have not agreed upon the quantum of the asset pool and the allocation on the assets, I suggest you may wish to reflect on whether or not the business valuation is still a reasonable assessment of its value.  Some may have increased in value whilst others have declined.

In my opinion, determining the asset pool based on last year’s figures and not considering COVID19 may result in an outcome that is not just and equitable.

For those that have already agreed a settlement or where the court has determined the allocation, the potential changes in value from current circumstances will not affect the parties.

For others, the choices available include

1. Accept the current valuation
2. Agree on a modification to the current valuation
3. Update the valuation as at the current date
4. Seek to delay the valuation until the new normal develops, perhaps agreeing on a percentage split now

In March 2020, the International Valuation Standards Board published “Dealing with valuation uncertainty at times of market unrest”.  It said “One of the main issues when dealing with valuation uncertainty is that a valuation is not a fact, but it is an estimate of the most probable of a range of possible outcomes based on the assumptions made in the valuation process.” 

Valuing a business at the present is not without its challenges.  There is an element of uncertainty is inherent in most market valuations and currently that uncertainty has increased.

However, just like during the GFC, a valuer would undertake a similar process to what we would normally do including

• an analysis of the current and expected economic conditions and the specific industry conditions based on what was known or knowable as of the valuation date
• assess the impact of the economic and industry factors, as well as the financial and operational performance of the business being valued and its prospects
• determine an appropriate valuation methodology; and
• assess the cost of capital based on the risks associated with the business and its ability to achieve forecasts
• estimate the value of the business

It is also probable that the Capitalisation of Earnings method, one of most common methods of valuing smaller and medium sized business will be used less frequently in the near term and that the use of Discounted Cashflow method will increase. 

Capitalisation of Earnings implicitly requires an estimate of a single earnings figure, previously called future maintainable earnings.  In the current circumstances, it may be more appropriate to use the Discounted Cashflow method which uses forecast earnings and cashflow over a number of years and then discounts these cashflows back to a present value.