MONDAY, AUGUST 10, 2020 | SERVING CHICAGO’S LEGAL COMMUNITY FOR 164 YEARS | CHICAGOLAWBULLETIN.COM VOLUME 166, NO. 122 COVID-19 impacts financial side of divorce process, valuing assets Like many other facets of saw declines in revenues. Fac- rates which have been com- our daily lives, COVID-19 has tor in the speculation sur- pounded by questions and created special challenges in rounding the uncertainty of speculation surrounding how divorce proceedings. Many are when we can return to “nor- the CARES Act will be ulti- familiar with the unique chal- mal,” and parties currently in mately funded. lenges COVID-19 places on the midst of a divorce with There are also several inter- parenting time and parenting complicated business valuation nal risks of COVID-19 that vary decisions, but COVID-19 also are presented with unprece- from business to business that affects the financial side of the dented challenges. When faced will affect the value of that divorce process and has exac- with such a paradigm, the best business. Some of these gen- erbated already complicated option is to turn to traditional eral internal factors include but financial issues. Specifically, methods of business valuation MODERN are not limited to: (1) earnings COVID-19 has created a pecu- paying special attention to FA M I LY history for a business and liar problem with respect to these various influencing whether or not such is stable valuing assets. COVID-19 factors that or volatile; (2) earnings expec- Section 503(a) of the Illinois undoubtedly affect the value of KATHERINE WELZ HERR tations and recalculating pro- Marriage and Dissolution of a business. jections; and (3) cash flow Marriage Act requires a Court Fair market value is generally challenges while the need for to “make specific factual find- “measured by what a willing cash is heightened. KATHERINE WELZ HERRis ings as to... values... .” Similarly, buyer would pay a willing seller These various factors put an associate at Schiller Section 503(d) of the Illinois in a voluntary transaction.” In divorce litigants in the precar- DuCanto & Fleck LLP. She is Marriage and Dissolution of re Marriage of Grunsten, 304 ious position of determining a Marriage Act specifically Ill. App. 3d 12 (1st Dist. 1999). well-versed in all areas of valuation date for a business. requires a court to divide the Many Illinois courts have family law, including Section 503(f) of the Illinois marital property between the affirmed the use of Revenue complex financial and Marriage and Dissolution of parties taking into account sev- Ruling 59-60 as a guide for business matters. She is a Marriage Act states that the eral factors including “the valuing closely held busi- court “has the discretion to strong advocate for her value of the property assigned nesses. See, e.g., In re Marriage use the date of the trial or client’s personalized needs. to each spouse.” Therefore, it of Pulls, 268 Ill. App. 3d 882 such other date as agreed is imperative for a court to be (1st Dist. 1994). Revenue Rul- She uses her strong upon by the parties, or provided with sufficient evi- ing 59-60, as modified by Rev- analytical skills to develop ordered by the court within its dence to assign a value to enue Ruling 65-193, provides cogent legal arguments on discretion, for purposes of assets. However, during this several salient factors to be her client’s behalf. She can determining the value of time of economic uncertainty, considered in the valuation. assets or property.” be reached at the question becomes, how These factors include, among Under certain scenarios, it kwelzher r@sdflaw.com. can assets be valued such that others, “the nature of the busi- may be beneficial to argue that both parties’ interests are pro- ness and the history of the there are conflicting reports on a Dec. 31, 2019, valuation date tected? enterprise from its inception,” whether a recession is officially should be used for purposes of This issue is particularly “the economic outlook in gen- underway and how deep it determining the value of the prevalent with respect to busi- eral and the condition and out- may go. Like many other business. If the business was ness valuations. From the 2008 look of the specific industry in aspects of COVID-19, the last- particularly profitable in the Great Recession until COVID- particular,” “the earning capac- ing effect is unpredictable; (2) years leading up to COVID-19, 19, the U.S. had seen the ity of the company,” “the divi- there are concerns that it could be argued that the longest economic expansion dend-paying capacity,” and directly relate to entire indus- Dec. 31, 2019, valuation date on record. That all came to a “whether or not the enterprise tries ceasing operations, such more accurately captures the screeching halt in March when has goodwill or other intangi- as the restaurant and entertain- value of the business and you quarantines and lockdowns ble value.” ment industry, with no real cannot compare the lasting needed to fight the virus’s When considering these fac- guarantee that these busi- economic effects of the 2008 spread forced many businesses tors in light of the external nesses can be fully operational Great Recession to the current to close their doors, and even risks of COVID-19, there are in the foreseeable future; and economic climate of COVID-19 those businesses that were several elements that will affect (3) there are political uncer- as a benchmark for the future able to keep their doors open the value of a business: (1) tainties with respect to tax given the difference that the Copyright © 2020 Law Bulletin Media. All rights reserved. Reprinted with permission from Law Bulletin Media.2008 Great Recession was a next COVID-19 victim. Under tively, spouses can choose in Without a “willing buyer,” “demand shock,” whereas this scenario, the spouse their marital settlement agree- arguably a fair market value COVID-19 is a “supply shock.” would argue that a valuation ment to essentially “kick the cannot be determined since This argument, however, date closer to trial would pro- can” down the road and agree the very definition of “fair mar- could be easily flipped given duce a more accurate picture to value the business at a later ket value” assumes a “willing that at its core, it is mere spec- for the value of the business. date when things are more sta- buyer” and a “willing seller.” ulation. Truth be told, no one The answer may be to take an ble to determine the amount Of course, there are risks with has a crystal ball that can with average of the value of the of a “buy-out.” During these all options which should be 100% accuracy predict business as of Dec. 31, 2019, times of uncertainty, it is rea- explored with an experienced whether a business can return and as of the date of trial to sonable to assume that it attorney and/or expert that to its pre-COVID-19 value, or arrive at a value for purposes would be difficult or impossi- can help a spouse navigate this whether it will become the of dividing property. Alterna- ble to find a “willing buyer.” uncharted terrain. Copyright © 2020 Law Bulletin Media. All rights reserved. Reprinted with permission from Law Bulletin Media.