Should I Proceed With A Business Valuation During My Divorce Amid COVID-19?
Should I proceed with a business valuation during my divorce amid COVID-19?
I do not practice law in your state. Therefore, I cannot inform you as to the specific laws of your state, but I can provide you with general tips for this sort of issue.
Given the current state of the economy and COVID-19, divorcing spouses who own businesses will face some very complex issues. Generally, if you are the spouse who will be keeping the business, a lower business valuation will be helpful. On the other hand, if you are the spouse who will not be keeping the business, a low business valuation can be detrimental to you.
However, the answer of whether it is advantageous to proceed with a business valuation in light of the current economic situation depends on many different factors.
When parties get divorced, any businesses spouses own are considered assets, which must be allocated. The business will be given a value that is determined through a financial professional (usually an accountant) conducting a business valuation. There are many different approaches and methods to valuing businesses, which can create different values. In most cases, the standard for determining a business value is the “fair market value.”
The IRS states that “Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” Therefore, the current market conditions certainly can impact a business valuation and the fair market value.
For instance, a business that currently has no customers, due to the state of the economy, likely will have a decreased fair market value. This is because there would be few people that would buy the business, or a willing buyer only would buy it at a much lower price than they would have before the COVID-19 pandemic.
Although business valuators always will review extensive business documents and historical financial data from months and years prior, they cannot make an accurate valuation without considering the current state of the business and factors that will continue to affect it. It should be noted that if spouses already have agreed to a “valuation date,” or there automatically is a valuation date by virtue of law in the spouses’ jurisdiction, there can be further issues.
Given the unprecedented circumstances the economy is facing, divorcing spouses that own businesses should proceed with caution. Therefore, if you are a divorcing spouse that owns a business, you should consult with an attorney in your jurisdiction.