Business valuations in the age of COVID-19: Managing the impact of economic upheaval

Accurate business valuations are essential when you are buying or selling a business, in litigated circumstances such as divorce or in conjunction with planning your estate. In normal times, valuation opinions generally do not fluctuate significantly over a short period of time.

But these are not normal times.

Businesses are feeling the pain from the COVID-19 shutdown. It might seem that a valuation dated on or before Dec. 31, 2019, would be changed to reflect the cataclysm that followed, but this is not the case.

Why not? And what should you do if the COVID-19 may impact your valuation? Here, we answer your questions.

Business valuation date

Why don’t valuations change to reflect post valuation date economic upheaval? There are two primary reasons:

Paper chase: Business valuators base their conclusions on a wide range of data, including past performance, expected earnings, and rates of return on investments. By necessity, the valuation process involves a time lag. Business valuators peg their conclusions to a specific date, and getting the full picture requires gathering data from the documented sources at that specific date.

Year-end valuations are quite common. In these cases, the valuator augments the business’ internally prepared financial statements with its CPA prepared financial statements and tax statements. Hence, the valuator must wait for the year-end statements to see the full year’s adjusted numbers.

For divorce purposes, business valuations have specific valuation dates. Valuation of non-marital assets that remain in the hands of one spouse are generally valued at the date of separation. The date for valuating marital assets is generally a date as close to equitable distribution, as practical.

Valuation standards: Standards promulgated by the American Institute of CPAs (AICPA), guide the valuation process. These principles state that valuations are based on information known or not knowable at the valuation date. Therefore, information or events subsequent to the valuation date are not considered unless known or knowable.

The valuation does not mention those subsequent events because they “are not relevant to the value determined as of that (valuation) date.” However, some events are significant enough to warrant disclosure in a separate section of the report. In essence, the business valuator could insert a comment confirming that the findings reflect conditions as of the original valuation date and acknowledging a “subsequent event.” The reader, such as a judge of family law master, could interpret the note as recognition that the business’ at-the-moment value might be impacted.

Summary

A well-prepared valuation is based on objective data and is defensible if contested. As we have seen, the valuation dated at Dec. 31, 2019, does not change because the economy takes an unexpected plunge in March 2020.

At this unprecedented moment, it is important to make rational decisions based on fact and law. The selection of the valuation date is critical, and each party needs to understand its impact. A professional business valuator at Boyer & Ritter can offer guidance to help attorneys and businesses map out next steps and emerge from the economic storm in a position of strength.