David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.
Last year, in two blog articles, I discussed how business valuations were being affected by the COVID-19 pandemic. In this blog article, I discuss additional observations based upon business valuations I have either prepared or that others have prepared, and I have reviewed as well as the changing impact of the COVID-19 pandemic.
One key aspect of business valuations is that any information must be known or knowable as of the valuation date. However, in many divorce cases, the valuator is also required to update the business’s value for changes that have occurred since the original valuation date. This past year, I encountered several opposing divorce expert valuation updates which were dated in mid-to-late September 2020.
In each case, the opposing expert relied upon the 2nd quarter 2020 economic activity reports and forecasts which showed such a significant drop in economic activity due to COVID-19. At that time, 2020 was forecast to have a full year decline of 18%. Each valuation therefore showed a significant decline in business value based upon this.
However, in each case, there was easily obtainable data from reliable sources (such as the Federal Reserve, etc.) showing a significant recovery during July, August, and early September. In fact, as of September 16, 2020, the Federal Reserve Board revised its 2020 full year decline down to 3.7% from the previous forecasted 18% decline. By the December 16, 2020 Federal Reserve Board forecast, this 2020 full year decline was down to just 2.4%.
Also, as of December 16, 2020, the Federal Reserve Board was forecasting economic growth of 4.2%, 3.2% and 2.4% for 2021, 2022 and 2023 respectively. By the June 16, 2021 forecast, the Federal Reserve Board had increased the 2021 growth projection to 7.0%. But, of course, all of this was before the Delta variant exploded during the last month and a half.
This is already causing discussion of additional mandates and lockdowns which could reduce economic activity for the second half of 2021. In fact, a recent Commerce Department report showed that retail sales had declined from expected levels in July 2021, portending a potential economic slowdown.
Nevertheless, I expect some divorce valuation experts to “rush out” valuations in September to use the higher forecasted numbers from June. Such higher numbers will, of course, result in higher values for the subject businesses. Such valuations would improperly ignore the information occurring in July, August, and September.
As in the “gaming” of economic forecasts, I have also seen some opposing expert valuations which relied upon the precipitous drops in company revenues and profits in the first half of 2020 to project significant losses for 2020 and beyond. In one case, the valuation concluded that the business was likely to shut down by the end of 2020.
However, the business did turn around in the last half of 2020, and has exceeded first half 2019 profitability in the first half of 2021. Again, these valuations were “rushed out” before the turnaround trends could be established.
I expect we will see similar attempts by some divorce valuation experts to use the positive early 2021 revenues and profitability to show higher business values before the full impact of the Delta variant can be determined.
If you require a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.
