Financial Uncertainty and Business Valuations

By Sheryl Rentz on July 30, 2021

The impact of the COVID-19 pandemic led to great economic unrest across the country, with numerous businesses applying for PPP loans, government relief, and loan forgiveness to avoid sudden closures. The full effects of this financial uncertainty will be felt for years to come, and no one knows that more personally than business owners who are going through divorces. Dividing a business during a divorce is difficult in any scenario, but the lows of 2020 may call into question the true value of your business.

Evaluating a Business’s Value During a Divorce

If you are in the midst of a divorce, you may be keenly aware of the importance of setting a value to your business. A business founded during a marriage can be subject to Pennsylvania’s property division laws and play a major role in divorce settlements. In order to properly divide a family business, you must come to terms on its monetary value in your marriage.

There are several methods for determining your business’s value, including:

• Asset Method: With this method, a financial advisor or family law attorney will add up the value of all of your business assets, including real estate, furniture, computers, tools, copyrights, and trademarks, and subtract any liabilities.
• Market Approach: Business owners can determine the value of their companies by comparing them to similar competitors who operate in the same market or field. For example, a doctor may use the value of a nearby clinic to determine his own practice’s value.
• Income Method: This method pays close attention to your business’s financial history and estimates the potential income you could receive as it grows.

Each of these methods has its own benefits and limitations, and you should always speak to an experienced divorce attorney to determine the best approach. This is especially true if your business was impacted by the economic uncertainty of 2020.

Why 2020 Changed Things

The financial fallout of sudden stock market shifts, COVID-19 restrictions, closures, and supply chain issues all culminated in a severe drop in profits for most small businesses. Even companies who believed they could weather the storm were affected by closures of distributors and manufacturers who played an important role in their supply chains. There was not a single business that had to reevaluate how they approached their markets during the pandemic and most ended up applying for new PPP loans to deal with the fallout.

If your business faced a sudden loss in income or was required to take on new loans to weather the storm, the value of your business could remain in flux for some time. You may also have to acknowledge the economic shift in your professional area if you take a market approach or calculate the impact of a sudden loss in assets as a result of closures.

For spouses who do not directly operate a business but still have a stake in its value, determining its value is key to making sure they get a fair share in a settlement. Your soon-to-be-ex may try to downplay a business’s profits in 2020 or delay in providing an accurate valuation.

In both cases, a family law attorney will need to comb through the details of your case to determine the best way to value your business.

Short-Term Relief, Long-term Impact?

Another element that could impact your business’s value is the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other forms of business relief that rolled out from 2020 to 2021. As valuable as this legislation was to keeping businesses afloat during the economic uncertainty, it also made an impact on these businesses’ values.

For example, let us say that one side of a divorce claimed that they saw a loss in income due to the instability of 2020. The other side of the divorce may contend that the business owner received relief through the CARES Act, as well as new PPP loans, that helped stabilized the business’s income. While the business owner may argue for lighter support payments due to the loss, the individual receiving payments may argue that the business now has a steady flow of income and should be able to afford the current payments.

There are many other issues a business may face as a result of the CARES Act, including adjustments to tax files for payroll until December 2022, PPP loan forgiveness resulting in sudden increases in cash flow for 2020, and business owners being able to amend 2018 and 2019 tax returns.

Working Through Your Options With a Family Law Attorney

Overall, the full weight of 2020’s economic shifts will not be clear for a number of years, and it will take the expertise of a knowledgeable Montgomery County family law attorney to calculate your business’s value in a divorce. At the Law Offices of Sheryl R. Rentz, P.C., our lead attorney has spent more than 25 years working with forensic accountants and business owners who were in the midst of high-asset divorces. We understand just how complex these cases can be, but we also have the tools and resources to help resolve any disputes. To discuss your case in a free consultation, call us at (610) 645-0100.