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Navigating COVID Disruptions

14 Jul 2021 1:08 PM | Deleted user

By Randall M. Paulikens, CPA, ABV, CFF, CITP of Friedman LLP

Do AAML fellows really need to hear another person talk about what has happened in the last 18 months?  All of us, as family members, business owners, employees and employers, buyers and sellers - know what has happened.

What we need to think about is - what will happen.  Some ramifications of COVID may not be as obvious as we would like/hope them to be.

Most professionals in the family law arena normally rely on the fact that the recent past is indicative of the near-term future. That is the family spending, income, etc. will largely continue into the future and the recent past allows us the opportunity to predict and advise clients, draft agreements, and settle cases that implicitly assume past is prolog.  

For valuation purposes, in most cases, the privately owned business was/is expected to continue in a similar manner as historically occurred.  When the expectations are vastly different (positive or negative), additional thought, creativity, and investigation is necessary.  We have all heard the terms “passive vs active”, “marital momentum”, “Goldman vs Goldman”, “change of circumstances”, “earnouts”, etc. etc.

Will the December 31, 2019 economy return? When will it return? How do you know? How can your clients make educated financial decisions post pandemic?

The economic news reports discuss emerging issues that affect businesses and could affect your clients’ finances. Therefore, all of us should discuss these issues and discuss the potential of any potential, future, changes. These issues include industry, worker, and geography specific.

Oversimplifying completely – business that were operating in 2015 to 2019 – now in 2021 basically fall into three categories. 

  • Businesses that have failed.
  • Businesses that have muddled through.
  • Businesses that have had banner years.

The first is straight forward – or is it? Did the business fail only to be reopened in a new incarnation?  Is the demand for the service still there and did the business fail due to the lockdown itself?

Businesses that had banner years – can the business and/or industry sustain their recent trend? Are the 2020/2021 levels of revenue, profit, backlog realistically expected to continue?  In 2020, when vacation travel was severely limited, people spent significant amounts of money on their homes. At some point, this will slow down or end, as competition for a family’s cash flow will increase as travel and leisure venues open.

Here is the hard one – companies that have muddled through. What does their recovery look like – recovery of revenue, recovery of profit – or some other measure?

Most will not argue that a restaurant that is/was limited to 25% or 50% capacity is not fully open.  Now that the capacity constraints imposed by various governments are lifted – does this mean that these restaurants are able to run at 100% capacity? With continual staffing problems, I am aware that some amusement parks are only open five days a week since they can’t staff entirely. I have seen many Starbucks close early for the same reason. From the valuation and income perspective, if these issues affect your case, how should you handle it? Is this a temporary issue, a permanent issue, or do we treat is as a hybrid?

Continuing with the restaurant example – did they ever really run at 100% capacity? Can we define 100% - does that mean a line for tables every night - or seven of ten tables being occupied for dinner?

Pre-pandemic, we might assume that the business was running at its effective capacity if its operations were consistent prior to marital discord. Don’t let the pandemic create an excuse to lower expectations and perhaps settle for less. Also don’t let the pent-up demand lead you to believe that the current situation is sustainable either.

I suggest that you use all of you own life/finance experiences, to create flexibility where possible as the long-term ramifications and adjustments we all make resulting from the last 18 or so months are yet to be known and measurable.

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