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Mediation and Business Valuations

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A Look into the Flexibility Mediation Can Provide to Parties Separating in Unprecedented Financial Times

Meditation

Due to COVID-19, many couples are facing tremendous financial uncertainty. Families that were previously leading successful financial lives prior to March of 2020 may still be suffering due to lost jobs, depressed property values, and failing or temporarily closed businesses. In a divorce case, both for equitable distribution of assets and to calculate child support and spousal maintenance, business values and business income must be established. In such an uncertain financial climate, the valuation process can become an enormous source of contention. In many cases – whether a business has been suffering over the last year or operating more successfully than ever – couples have very different viewpoints as to the outlook for the business. Will the business bounce back? Will the business close? Will the business revenue decrease back to pre-pandemic numbers once “normal” life resumes? These are all unknowns that can only be determined with time, but in a litigated matter running on the Court’s clock, parties do not have the luxury of time to wait and see how it all plays out.

In Court, when there is a business at issue, the value is typically determined as of the date the divorce action is filed. For Covid-era divorces, this means that the value of a business may be dramatically different depending on when exactly the divorce process started – pre-pandemic, mid-pandemic, or now, when life seems to be veering back toward normal. If the parties cannot agree on a business value and the valuation date, then it becomes a battle of the business appraisal experts at trial. This process is long, expensive, and fraught with unknowns.

When it comes to issues involving business valuations as we move past the pandemic, more and more couples are turning to the mediation process because it allows for creative solutions, tailored to the specific needs of the parties. As compared to the Court system which operates within a very rigid set of rules, mediation is a voluntary process that enables parties to have a direct voice in the resolution of their disputes outside of Court. During mediation, the parties meet with a neutral third-party to facilitate an amicable resolution of the issues they were unable to resolve on their own. As part of the process, the parties can agree bring in experts to assist with resolving sensitive or difficult parenting and financial issues.

Over the last year, financial experts, like Glenn Liebman, a principal of Klein Liebman & Gresen, LLC, have been asked into the mediation process more frequently to assist in finding thoughtful ways of addressing business valuations in an uncertain financial climate. While a business may be failing now, that same business may rebound in future years. Rather than putting the divorce on hold until the financial landscape is more certain, or rolling the dice in Court, the mediation process enables parties to think out of the box, to address both the downside and the upside of those two scenarios so that they can resolve their divorce now.

Jessica L. Toelstedt, Esq., a trained mediator and partner with Berkman Bottger Newman & Schein, LLP, sat down with Glenn Liebman to find out why involving someone with his expertise can be crucial in the mediation process, now more than ever.

Q: Glenn, can you tell our readers what you have been seeing during the past 18 months since the pandemic started?

A: When the pandemic first hit in March 2020 and the national economy effectively shut down except for essential areas of the economy, there was an absolute panic and fear that I have not seen in 25 years in the business. First and foremost, on people’s minds was preventing themselves and their loved ones from contracting the illness which everyone knew could lead to death. The least of people’s worries was the value of their businesses. During the Spring of 2020, as the situation wore on and everyone realized that COVID-19 was something we would be dealing with for the long haul, technological advances became a saving grace to enable our society and economy to function. Zoom and Microsoft Teams enabled friends and family to communicate and stay in touch face-to-face, and allowed businesses to operate and commerce to function. Remarkably, as we waded through the fall and into the winter of this past year, everyone learned and adapted to social distancing, and online transactions across nearly all businesses became the norm. As we moved into 2021, the introduction of the vaccine really alleviated fears and things have rebounded very well across many industries.

Q: How have the last 18 months impacted those in mediation with respect to business valuations, and what has been your experience in the cases you have been involved with during this time frame?

A: That’s a great question! When the pandemic started in March 2020, many spouses were in the midst of mediation that had started months earlier when things were generally fine.  I was involved in several of these cases. One such case involved the husband owning two restaurants that were completely shut down due to the pandemic, and my role was to value the businesses. Overnight, it became apparent that the question of value was taking a back seat to the very real concern that these two businesses would not survive the lockdown. The value of most businesses is based upon the income stream the business provides to the owner. So, this immediate shutdown not only jeopardized the value of businesses, but also income streams that are the basis for child support and maintenance determinations. The loss of income was catastrophic to these families and was impacting every aspect of the divorce case.

Q: What happened in those situations in the early days of the pandemic?

A: Quite frankly, not a lot for several weeks. People were paralyzed to do anything. My phone was very quiet in late March of 2020 through nearly Memorial Day. People needed to regain their equilibrium and balance from the shock of the pandemic and economic shutdown. As business owners began to secure government aid through PPP loans and gradually conduct business, the panic and fear began to subside. As we moved into the summer, people started to come back to the table to resume mediation sessions with the hope of moving forward with their lives.

Q: When spouses came back to the mediation table was there a different atmosphere?

A: In most cases, definitely. In many instances, businesses, while they were operating, were still not doing nearly as well as they had been prior to the pandemic. Business owner spouses were concerned about the decline in their incomes and values of their businesses, not to mention their ability to pay child support and maintenance as a result of their lower income. Non-business owner spouses, while generally sympathetic to their spouses, had their own fears about receiving enough support to continue living the lives they were accustomed to before the pandemic.

Q: How did you work with mediators and the clients in that kind of environment?
A: I stressed that everyone needed to be very flexible in their approach and if they could not, they should wait things out and revisit the situation each month. For couples wanting to move forward, that flexibility entailed me providing a range of values for a business as opposed to a single opinion of value that I frequently provided prior to the pandemic. The range provided a best case, worst case and mid-range value based on the assumptions that the pandemic would ease quickly, not so quickly and some intermediate time frame. Many cases were able to settle because the parties were reasonable, flexible and practical.

  1. What is the situation now in mediations involving business valuations?
  2. While I wouldn’t say things have returned to normal – after all, what is normal anymore? I would say that things have become less fearful, and many businesses have returned to a new, but more predictable level of earnings. The new level of earnings ranges between those companies that are doing worse than before, some that are back to where they were, and some businesses, I see doing better than ever. That last category comprises businesses that were able to use technology and creativity to not just survive, but thrive, in a post-pandemic world. The question remains, how will those ranges fluctuate as we move past the pandemic, and to what extent that fluctuation should impact the distribution of assets in a divorce that is happening now.

Thank you, Glenn, for your insight and experiences. It is clear, that given the ongoing uncertainty in the financial world due to the new Covid variants, the need for booster shots and the ever-changing Covid numbers, the mediation process is providing divorcing parties with greater opportunity to discuss and agree upon unique, creative and practical ways to handle business valuations and uncertain income streams.

Berkman Bottger Newman & Schein LLP represents business owners seeking a divorce. We offer mediation services to clients throughout New York City and Westchester. Please call us at (212) 466-6015, or reach out to us through our contact form today. We maintain offices on 5th Avenue in Manhattan, in Westchester, and in Bergen County, NJ.

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