As a small business owner, you know all about risks and rewards. You have few if any safety nets. No one is there to back you up if you need a day off or if there is a downturn. Right now, with COVID-19, you are likely unsure what to do, especially if you find yourself in the midst of a divorce or if one is about to begin. I have been practicing family/divorce law for over 20 years, so I know your concerns. These are unprecedented and uncertain times. You should not have to worry about how the valuation of your business will fair during that divorce.
So that you know, the income approach to business valuation will very likely take your COVID-19 risk into account. Simply stated, the income approach considers three factors to determine value: cash flow, growth, and risk. Each factor may or perhaps will, be affected by current events.
Cash flow is defined as the earnings stream the business expects to generate in perpetuity. In some instances, these results may be adversely affected or expanded from the effects of the coronavirus.
Growth rates measure the expected growth rate applied to cash flow. A pandemic like a coronavirus may have both short-term and long-term growth affects – particularly if it initiates an economic recession.
Even under normal conditions, the evaluation of risk is often a critical part of the valuation analysis. Risk has a direct effect on the valuation multiple. The higher the risk, the lower the valuation multiple used in the income approach. Risk now has to also consider the effects of the business due to the coronavirus.
As of today, it may be too soon to say what the long-term effect the coronavirus will have on our economy or the valuation of your closely-held businesses. You should marshal your business’ current resources to support it n the short-term.
Ronald Lieberman, Esq. is a shareholder and partner with Adinolfi, Lieberman, Burick, Falkenstein, Roberto & Molotsky, PA in Haddonfield, New Jersey. He focuses his practices on all aspects of divorce and family law including cases involving small business valuations.