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The Effect of COVID-19 on Business Valuations

While the situation with respect to COVID-19 continues to evolve, the effect on businesses and therefore the flow on effect on business valuations is significant. As the Australian Government continues to implement measures related to social distancing and isolation, issues surrounding supply chain, workforce, and cash flow continue to affect business valuations and continuity, with temporary shutdowns due to the restrictions now in place.

Business valuations have an enormous impact on Family Law property settlements, and are an invaluable tool used in assisting to resolve issues between litigants, even more so now in such an unprecedented COVID-19 environment.

It is therefore vital that businesses respond accordingly to the impacts of COVID-19, and navigate current issues, as well as those that can be anticipated in the foreseeable future.

This blog will address the impact on business valuations that may be in progress, and discuss how forensic accountants are responding to business valuations while businesses are shut down but will likely re-open in the future.

Job losses

The human resources function within any business is undoubtedly experiencing strain during these unprecedented times. As management struggle with the decision to lay off employees on the basis of redundancy, annual leave, unpaid leave or reduced work hours, there is also the requirement to maintain and support employees and observe social distancing requirements. As many businesses have now shifted to an online and virtual frontier, many jobs have become redundant and the efficiency and effectiveness of business operations are therefore adversely affected.

The obligation also falls on the human resource function within a business to appropriately implement and manage a policy on employee conduct if they are feeling unwell, whether this be to seek medical attention or undergo voluntary isolation. This may also have implications on all those in the physical workplace if a fellow colleague is suspected to have, or have been in contact with a confirmed case of COVID-19. These policies would also coincide with the range of Employee Assistance Programs (EAP’s) that various employers offer for their employees.

Cash flow

While the general public is refraining from engaging in many markets and services, there is an expected impact on the cash flow of any business amidst these times.

Management may be required to conduct appropriate negotiations with suppliers or clients regarding the renegotiation of payment terms, which may be interim to deal with reduced cash flow in coming months.

Utilising banking services may also be invaluable to a business regarding additional funding and restarting business operations.

Furthermore, banking and lending institutions are offering hardship services that can be of support to any business experiencing financial hardship resulting from a lack of cash flow. While cash flow has been significantly affected, rental relief may also need to be arranged with respect to the premises where a business operates, especially since many businesses are unable to operate from their office premises.

Forensic Accountants

With the evolving nature of this global economic event, many business financials will have ceased as of March/ April 2020. Forensic accountants must ensure that their valuations and reports are meaningful and transparent during these circumstances, especially as many partners continue to navigate a financial property settlement.

Forensic accountants may therefore be required to reassess the value of the business upon its reopening in the foreseeable future, or continue with their valuation in the present climate especially if litigants are keen to mediate or have a looming Court date.  

This may involve a valuation being made ‘Pre-COVID-19’ and ‘Post-COVID-19’, with limited scope due to the current business and economic climate. This would ensure that the valuation made is a true reflection of the business’s value at the point it reopens, after the current restrictions have been lifted.

Forensic Accountants may also consider the ongoing impact of COVID-19 by including a discounted cash flow methodology, to replicate the current cash flow of the business in the circumstances.

Support for business currently affected by COVID-19

The Australian Government continues to monitor the situation with respect to COVID-19, and is announcing new restrictions on businesses as the days progress. So too, the Government is working to support businesses impacted by COVID-19. At the Federal level, the $130B ‘Job Keeper’ package is open to all businesses significantly impacted, in conjunction with a range of stimulus packages currently in the midst of being implemented.

The Australian Taxation Office is also encouraging businesses impacted by COVID-19 to seek temporary relief options.

Family Law Property Settlement

Those who are considering a property settlement, or are midway through a property settlement, may be adversely affected by the current social and financial environment amidst COVID-19. Consider the following factors:

  • The ongoing cashflow of businesses may be put under significant strain over the coming months, until social distancing measures are lifted.
  • With the recent falling of the ASX by 30% in the past month, asset pools comprising listed shares are now significantly less valuable. As superannuation is largely comprised of these types of assets, superannuation balances will also be adversely affected. As such, investment values should be updated before finalising any property settlement.
  • Major industries will be impacted by COVID-19, and accordingly advice as to the potential financial consequences of settlement should be sought where the asset pool includes businesses that are part of an affected industry.
  • In consideration of the declining property market, real estate values are also expected to decrease and property valuations conducted in February 2020 may now already be outdated, and require an updated valuation.
  • Settlement issues may arise in relation to the extent of available cash, liquidity of available assets, and the ability to obtain finance, all impacting on child support and maintenance packages.

Nicholes Family Lawyers will continue to monitor the effect of COVID-19 on businesses and business valuation, and will provide more information as it becomes available.

By Nicholes Family Lawyers

 

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