Covid-19: PPP Considerations for Business Valuation
The ongoing Covid-19 pandemic has made fundamental changes in how people interact with the world around them. Businesses immediately felt the impact. Small businesses of all kinds were forced to shut their doors in order to protect the public and their employees. The Paycheck Protection Program (PPP), among other emergency relief funds, was offered as a remedy. It was designed to provide needed cash flow in order to continue paying some of the necessities in running a business, such as employee payroll, mortgages/leases, and utilities. It has been almost ten months since the beginning of the pandemic. In this time, life carried on. Unhappy spouses still sought divorce. And as part of those divorces, businesses still required valuations, including businesses that utilized the PPP. But how can the PPP affect the value of a business?
Divorces and the distribution of property can be a long process. Divorces initiated before the pandemic have been impacted. Especially those spouses with a claim for equitable distribution (ED) containing a business. If your business was appraised before the pandemic, chances are that the business was significantly affected by the pandemic, and value has changed. It may be wise in such cases to have an addendum prepared or re-valuation to capture the changes stemming from Covid-19. North Carolina law allows courts to consider the post-separation diminished value of a business before the distribution or settlement.
For those business-owning spouses, the PPP and pandemic will have an effect on valuation. Afterall, the PPP provides cashflow, and is considered a loan (one that may be forgivable). In analyses that rely upon historic data, Covid-19 and the PPP may have made the historic data unreliable in current times and for uncertain futures. Asset approaches need to determine how to properly handle amounts for any outstanding loan, probability of forgiveness, and their interest rates. Models that rely on income need to keep PPP cash in mind and determine how to treat the funds: loan vs. forgiveness. Market approaches also need to account for the effects when considering comparative guideline companies and their transactions.
When you sit down and speak with a family law specialist in your ED case, make it known that you have received a PPP loan or applied for one. Moreover, inform the attorney as to the status of loan forgiveness. Provide the necessary information from pre-Covid and post-Covid times so that you have an accurate picture of your business. Do the same if your spouse is the one that owns the business. There are many approaches to valuation, but each method needs to account for PPP funds and the current pandemic’s effect on the business climate in North Carolina and the country. It is paramount to have accurate valuation for a business in these trying times.