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The World Health Organization (WHO) officially declared the novel coronavirus (COVID-19) a pandemic on March 11, 2020. Understandably, parties involved in matrimonial litigation will wonder how the events of COVID-19 will impact the value of their family-owned business. This article is intended to illustrate some key issues for the parties (and their advisors) to consider.
It is our opinion that most businesses have been significantly impacted as a result of COVID-19. A few examples illustrating how COVID-19 is impacting businesses include:
Due to the above, businesses will likely see a reduction in business value. From our observations and professional judgement, we expect business value to drop approximately 15% to 20% on average as at the time of writing this article.
Please keep in mind that every business is unique, and our advice is general in nature. Contact us if you want more information on your specific situation.
For example, a cruise ship business will likely see a large decrease in value as bookings decline due to consumer fears. On the other hand, a company producing hand sanitizer might actually experience sales volume increases for years to come, thus having a very positive effect on business value.
In a family law setting, the party retaining the property (i.e. the shares of a company) must make a settlement payment to their spouse. This party will be motivated to have the business valuation reflect the full impact of COVID-19. You might hear statements like “COVID-19 has had a drastic effect on the business”, or “the business has been completely destroyed and should be valued on a liquidation basis”.
On the other hand, the party receiving the settlement payment would prefer to have the business valuation ignore the impact of COVID-19. They might be motivated to settle based on a valuation report previously prepared, for example as of December 31, 2019. Or, they might present arguments that COVID-19 has had only a “minor or short-term impact on the business”, and thus a valuation update would be a “waste of resources resulting in an unnecessary delay in the proceedings”.
From our experience, the true impact of COVID-19 on the fair market value of a business usually lies somewhere in between the two extremes.
In the event that a valuation report has already been completed for the purpose of settlement negotiations or trial preparation, the question arises as to whether it ought to be updated to consider the impact of COVID-19.
In our opinion, the answer is an emphatic Yes! Any valuation report that has a valuation date prior to when the COVID-19 pandemic was known or knowable, should be updated as it will generally overstate business value. If left in their current form, these valuation reports will likely be successfully challenged if they are not updated prior to the trial date.
Court proceedings have been suspended amidst the requirement for social distancing put in place to stop the spread of COVID-19. So, we have not seen any examples of court decisions in this regard.
However, given section 87 of the Family Law Act:
we believe there is a strong case for the courts to reject a valuation report that uses a valuation date which does not consider the impact of COVID-19.
It may be hard to pinpoint the exact date that the events of COVID-19 were generally known or knowable and this will surely be a topic of debate between the parties involved. We have summarized below a helpful timeline on the important dates of the COVID-19 pandemic in BC:
If you are involved in a family law matter, or you are assisting a client in their settlement, a qualified advisor, such as a Chartered Business Valuator (CBV) can help you assess your situation, or prepare an independent valuation report which takes into account the current economic environment and the impact of COVID-19.
If you would like to discuss your unique situation, please contact one of our CBV’s or complete our Get in Touch form and we will contact you directly.
CPA, CA, CBV
Partner - Advisory Services
Mike has over 25 years of experience providing accounting and business advisory services, with a focus on the Canadian insurance industry.
CPA, CA, CBV
Alex Wong is a partner at Smythe Advisory and is focused on being a trusted business advisor to his clients.
CPA, CA, CBV
Director of Valuation Services
Paul Woodhouse focuses on providing financial advisory and litigation support services to clients.
Gagandeep specializes in M&A advisory engagements, as well as business valuations in the contexts of management buyouts and succession planning.
Arthur’s mandate is to assist Smythe clients in Western Canada in preparing for and executing business divestitures or acquisitions.