Jeffrey Nedas considers where accountants should focus when looking at businesses in the context of divorce settlements.
If the street cries of the French Revolution were for ‘Liberté, Egalité et Fraternité’ then for 21st century divorce finance negotiations about business interests, their equivalents could be ‘Value, Liquidity and Sustainability’.
Which of those three, in 2015, is the more important?
There has been a sea change since 2008. Then, there is no doubt that the overriding objective was company value – and in the booming pre Lehman Brothers financial world it was almost universally assumed that value was easily realisable and liquidity was easily obtainable: private companies were easily bought and sold and raising debt was but a spreadsheet away.
Perhaps this was why so many non-business owning spouses wanted clean breaks and so many company owners protested that their businesses had little value.
The Financial Crisis changed everything. The market for private businesses is a shadow of its former self. Buyers and lenders are ultra-cautious. On the other hand, if a seller of a profitable business wants to maintain an income – in the broadest sense of the word – without taking additional risk, low investment returns require that seller to seek a large capital sum. With willing buyers at the bottom of the hill and willing sellers at its peak, it is hardly surprising that there are few meetings of minds at the negotiating table.
So now it is the business owners who proffer the clean breaks whilst their spouses prefer an income stream.
If value and realisability are taking a back seat, which of the two alternative objectives should take pride of place?
In my opinion, it should be liquidity. It is said that ‘turnover is vanity; profit is sanity’. I would add the further precept, ‘cashflow is reality’.
A tangible, sustainable income is one which is capable of being paid to the recipient as salary, dividend or expenses – or a combination of all three – over time, and be freely spent on non-business matters. To achieve this ‘sustainability’ the business must first have adequate liquidity.
With the election out of the way and a sense of greater economic stability, banks appear to be a little more relaxed about lending to business – particularly SME’s. The door slammed shut in late 2008 is slowly, but surely, opening again.
Whilst the opportunity to borrow to fund capital settlements by extracting funds from businesses and companies may remain limited, the ability to fund working capital on a regular basis means that there is greater scope for business owners to have the wherewithal to enjoy the benefit of tangible and sustainable income.
To those seeking a solution to disputes on divorce about business assets, there is a valid case for asking accountants to spend less time placing theoretical values on unrealisable business assets and more time looking at liquidity and sustainable income.