If you haven’t done so already, sooner or later you will value a business affected by COVID-19. What do you do with several years of historical performance that the virus negatively impacted? Ignore those years? Assume the business will rebound? This was the issue in a recent divorce case in Arizona.

Typical scenario: The husband owned a construction company that had just one client: a company that owned and operated a number of hotels. During the height of COVID-19, the client sold off several of its hotels, putting a dent in the husband’s company’s revenue. Plus, the company stopped servicing several other of the client’s hotels (apparently due to the COVID-19-induced slowdown in travel).

In valuing the company, the husband’s valuation expert treated the prior years’ financials as outliers due to COVID-19 and used the current year for the numerator of a capitalized cash flow (CCF) analysis. The wife’s expert did not do that—he used an average of the past three years as his numerator for the CCF, three years that included pre-COVID-19 higher revenues. He justified this by saying that industry prospects “looked positive,” implying that the company could make up for the lost business. Of course, the two valuations were “wildly different.”

A court accepted the three-year look back and the wife’s expert’s higher valuation. The husband appealed, contending that those three years were impacted by COVID-19 and were not representative of future cash flows, which is what the numerator is supposed to represent. He argued that the numerator should be the current year’s cash flows, which represents the effects of the lost business going forward. But the appellate court affirmed the trial court’s decision, saying it did not “abuse its discretion.”

The case is Dawson v. Dawson, 2023 Ariz. App. Unpub. LEXIS 1003, and a case analysis and full court opinion will be on the BVLaw platform.