How do you resolve a divorce case during COVID-19, when many businesses in all kinds of industries are coping with significant losses and continuing uncertainty over future performance? This was the topic of an excellent panel discussion during the recent AAML/BVR virtual divorce conference that included both business valuation experts and an attorney. Jason Naimi (Naimi & Cerceo), Briggs Stahl (Baker Tilly), and Tracy Farryl Katz (Gursey | Schneider LLP) presented the session, Where There Was None: Creative Settlements When Working With Distressed Businesses and Catastrophic Losses. Here are key points to keep in mind.
Initial questions: As the valuator, figure out whether and how COVID-19 affected the business. Although many sectors of the economy have felt the negative impact of the pandemic, some industries or some companies within an industry have done well. Make sure you keep doing industry research and understand where the subject company fits in.
Distressed business: Divorce itself is a stressful situation, made worse when the business whose assets may make up a substantial part of the spouses’ marital property is suddenly underperforming and there is no end in sight to the economic downturn. The panelists note there are ways to get out of this intractable situation, but none are easy.
One way is to make the ex-spouse a business partner, at least for the time being. However, this may be difficult where spouses seriously dislike and mistrust each other. If they accept this arrangement, it may include a plan to compensate the operating spouse (in-spouse) for work on behalf of the business and ensure the nonoperating spouse (out-spouse) has a right to review all financial documents to be kept abreast of business developments.
If time is less of the essence, the parties could take a wait-and-see approach and agree to determine the value of the business in six months, a year, or a year and a half. The expectation is that, by then, the owner and the financial experts have a better understanding of the effect COVID-19 has had on the business and industry and what to expect in the future regarding business performance.
Regarding the owner spouse’s support obligations, if a business’s earnings have been down, the parties could agree to a lower monthly payment for the time being with a kicker when more money comes. As the professional working on behalf of the nonowner spouse, make sure the increase in support goes into effect automatically, at an agreed-upon date. The nonowner spouse should not have to monitor a business’s developments and relitigate access to financial data.
COVID-19 discount: If the parties are determined to settle, the attorney and valuator can develop a payment plan that uses a formula applied to company performance for a specified number of years (i.e., two to five years). If your client is the out-spouse, consider a settlement that requires a minimum down payment with installment payments and a balloon payment at the end of the agreed-upon payment term. The valuators on the panel also say it’s not uncommon to apply a “COVID-19 discount” to any valuation, which can be a fixed or flat amount or a specified percentage. Also note that some businesses may actually have seen an increase in value because of the pandemic. Valuators need to consider this bump in income but also be aware that it may be a one-term occurrence. Determine the extent of the increase, and divide it between the parties.
Investment portfolios: Many couples have investments in stocks. The valuators on the panel caution that stock portfolios should be divided in kind. Make sure you and your client understand the makeup of the portfolio and when the various stocks were bought. Know the basis of the stock and use the same valuation dates for all assets in investment accounts to ensure an equitable distribution, the valuators recommend.
The conference concludes today, September 30, with a session, How to Effectively Use Spreadsheets to Collect, Analyze, and Present the Facts and Arguments. Plus, there will be a special session of online one-on-one speed networking. Additional coverage of the divorce conference will appear in the November edition of Business Valuation Update.