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Article:

Selecting the right expert accountant for your Private Financial Dispute Resolution (FDR) in ‘COVID-19’ times

15 June 2020

‘Private FDRs’ (sometimes called Early Neutral Evaluations) have grown in popularity in the past couple of years, especially following Sir James Munby’s statement in July 2018, shortly before he retired as head of the family division, that these could replace the Court-appointed FDR.  In the past, the privileged and confidential nature of private FDRs has been the driving force for selecting this forum. That was before COVID-19 put the brakes on the family courts, and finance matters in particular.  Now many family lawyers are looking to Private FDRs to get their cases moving again.  

As with a traditional FDR, the ‘judge’ will provide a useful steer on the likely outcome of taking the matter to a final hearing, which can unlock negotiations and allow the parties to reach an out of court settlement.  Other often-cited advantages of the Private FDRs are speed (even before the COVID-19 pandemic the court process could take many months) and the knowledge that on the day of the hearing it will be the only case that your judge is dealing with. Another advantage is that the parties can choose their own ‘judge’ (it can be any lawyer) with appropriate skills and experience to deal with the issues in their case, e.g. valuing complex groups of companies or dealing with assets held in trust, and so on.  

Once a private FDR has been agreed on, an expert accountant can be appointed to prepare a valuation of the business assets and can even attend on the day to answer questions, if needed.  The scope and format of the accountant’s report will need to be agreed between the parties if they are to share the cost.  If the parties cannot agree to appoint a Single Joint Expert in this role it is still possible for either party to appoint a ‘shadow’ expert, who will give them valuation advice before the private FDR, in order for them to be able to make an informed decision on any settlement offers that ensue.

But is it the right time to push ahead with a private FDR if the case includes shares in an unlisted company, or should you wait to see what happens with the economy?

The answer is, “it depends”.  The FTSE 100 share index fell 25% in the three months to 31 March 2020, recovering somewhat in April and May.  Some parties may have an interest in pushing through a settlement at a time when business assets are at a ‘low’ (and this may be acceptable to both parties if there is a risk that the business will not survive).  Others will simply not have to capacity to proceed as they focus all their attention on the short term survival of the business. But this pandemic will affect every business in a different way.  Whilst all businesses are being disrupted in the short term, some will flourish and grow as a result (e.g. Zoom), others will recover more slowly and some will fail. 

Businesses are facing unprecedented circumstances and are grappling with a host of issues such as supply chain failure, workforces furloughed, remote working and, for some businesses, a looming cash crisis.  Some will be able to restructure and survive, some will be forced into administration and may only survive by way of a pre-pack administration. Most companies cannot be valued as they were pre-COVID-19.

In these circumstances it is crucial to choose a skilled and experienced business valuer who understands the short, medium and long term impact on the business to be able to prepare a business valuation that is robust and meaningful in these uncertain times. Now is the time to gauge the true ‘experts’, those with sound experience.  Look for assurance that they:

  • have experience of working with companies in the relevant sector;
  • have access to corporate databases with up to date information on comparable companies and transactions;
  • plan to challenge the forecasts and assertions made by the business owner in light of the pandemic;
  • will consider whether management has been able to build resilience into their new ways of working to achieve the best outcomes; and
  • will involve taxation, insolvency and other relevant specialists to deal with any complex issues.

At BDO we are considering the historical results of companies we are valuing, along with the current COVID-19 position. We take into account the range of future prospects, and also look at how other businesses in the sector are reacting. Valuers need to be able to assess the relevance and quality of management forecasts post-COVID-19 and also be alert to double-counting the risk when selecting multiples. We have to step back and consider whether the valuation makes sense overall and will be useful for the private FDR.  

It is more important than ever to seek guidance on the level of cash that can be extracted from the business to fund a divorce, while allowing a generous ‘buffer’ in the business for the current economic uncertainties. Expect valuers to be more cautious when opining on the level of cash that is ‘surplus’. Liquidity is going to be a significant concern for most businesses in the foreseeable future, so staged payments are also likely to become commonplace in divorce settlements.

To get robust and meaningful advice for a private FDR it is now essential to select an expert accountant who can demonstrate their experience and credentials for assessing value during these COVID-19 times.

Below is an example of an expert report we have prepared recently for a Private FDR. The Group being valued was involved in the FinTech sector.

Our work involved the valuation of the Group on a sum-of-parts basis, reflecting the differing activities and stage of life cycle development of the subsidiaries. Our assessment considered the impact of restrictions pertaining to the shares and the potential upside of developing successful new products for a vast international market.   

This report was finalised in Spring 2020, a month ahead of a Private FDR. Based on our analysis and research we considered that a current ‘rock bottom’ valuation benchmarked at PLCs at the height of the COVID-19 share price collapse was not meaningful because this business faces potential growth from the pandemic in the medium term. 

The instructing solicitors were satisfied that we were able to provide an opinion of the fair value of the shares in what they acknowledged were “extremely challenging circumstances”. Our report helped the parties to agree an amicable settlement soon after the Private FDR.     

To find out more about this topic, or issues that Claire has discussed, you can reach her in the Forensics team.

Claire Round 
Director of Forensic Services
+44 (0)121 352 6203 DDI
[email protected]  

Sat Plaha
Partner / Forensic Services
Local:  0345 266 1127 (DDI)
+44 (0)7720 078030 (Mobile)
[email protected]

About BDO

Our team works in a range of forensic services, produces the annual FraudTrack report covered in national press, and are a recognised global cross-border investigations team. Our forensic and dispute advisory practices combine in-depth industry knowledge with experience and technology to provide innovative and recognised services.