Rocky Economy Alters the Valuation Landscape

The ripple effect of the global economic downturn has reached the realm of business valuation. As the value of real estate and businesses in many industries has dropped dramatically, valuators have been forced to change some of their methods. Attorneys, in turn, may need to adjust their expectations in several areas of practice.

The effect on estate and gift planning

Declining business values are creating both opportunities and obstacles in different legal areas. In estate and gift planning, the assets in an estate typically are valued as of the date of death. However, federal tax law allows an alternative valuation date of six months after death. If values continue to drop, using this alternative date may lead to reduced tax liability.Similarly, a taxpayer planning to make a gift of real estate or an interest in a business might want to delay the transfer if he or she believes the value of the underlying asset will continue to decline. When values are low, a taxpayer can move more assets for the dollar out of his or her taxable estate. When an asset begins to appreciate again, it will no longer be part of the estate.

Shifting divorce strategies

Attorneys may also need to rethink some of their practices in divorce cases. If one spouse has an interest in real estate or a business that has lost value, the nonowner spouse will receive less when splitting the interest’s value. These decreasing values are, in some cases, moving up divorce dates. The owner spouse wants to act while assets have low values while the nonowner spouse worries that values will drop even more.Because values are changing so quickly and sig-nificantly, some courts are actually reconsidering divorce settlements. In today’s economic conditions, a settlement can’t be assumed until the final decree is signed and filed.

Other legal considerations

Shareholder disputes may also be affected by declining values. For example, in cases where the wrongdoer’s payout will turn on the value of a business, the impact may be strongly felt.Depending on the industry, merger and acquisition transactions may also need to adjust to the changing economic landscape. Buyers and sellers might rethink their business combination plans, or at least take into account various timing issues. For example, previously comparable sales may no longer provide a reliable, apples-to-apples basis for setting a purchase price.

Changing valuation Methods

In an economic arena that’s radically different from those of previous historical periods, valuators can’t necessarily rely on historic data and multipliers. They need to incorporate more up-to-date figures using, for example, monthly data where they formerly might have used year end data. Similarly, when considering a business’s cash flows, a valuator must look at current sustainable cash flows instead of historic ones. Projections generally will require more research, because valuators must compile more material to support their valuations.Attorneys can make valuing businesses easier by taking a more proactive approach. You should, for example, bring in a valuator early so the expert can track the subject company’s changing fortunes and help you better time your actions. Also be prepared to provide more information than you previously did.

Proceed with caution

Until stability returns to the U.S. economy, attorneys must exercise extreme caution when it comes to value. Don’t just accept a valuation on its face.

Additional Reading:

"Financial Statement Analysis: Don't Value A Business Without It"

"Surviving The Latest IRS Challenge"

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