The world has changed dramatically due to the COVID-19 pandemic, and your business has likely been impacted in some way. Business valuation has changed as well and the pandemic has raised new considerations that need to be addressed by every business valuator. I believe the following “points for consideration” need to be addressed during business valuations. While I don’t have answers to how they may impact a valuation, because that would depend on the specific facts and circumstances, the following should be considered as they may play a role in the assessment.
- Date of valuation and the concept of “Known & Knowable.” A valuation should only consider what is known and knowable as of the effective date of the valuation. A valuation analyst should be familiar with the timeline of COVID-19’s progression in order to form an opinion as to whether the impact should be considered given the effective date of the valuation.
- What will a recovery from COVID-19 look like? Will it be a full recovery or only a partial recovery? How long will its impact last? These factors can impact the projected cash flow of a business which is critical input in any business valuation.
- Is there a new normal of social distancing, quarantines, and gatherings limited to a certain size? If so, will the profitability and cash flow of some businesses be capped at levels which are lower than pre-pandemic levels? (examples include limited seating in restaurants, sporting events and large gatherings being cancelled or attendance limited, or not being able to get parts for products a business is selling)
- Some businesses may not be able to return due to the impact of the pandemic. If this happens, does a thinned competitive market help businesses that survive? Could they be more profitable than before if they have less competition? If so, how much more profitable?
- Certain businesses have been positively impacted by COVID-19 (examples include businesses in the food industry and manufacturers of personal safety gear). How will this increase in sales, and possibly profitability, impact the future? Is it a new baseline or will a regression to pre-COVID-19 sales and profitability occur? How can you determine this?
- How do you factor into a valuation the impact of stimulus items from the CARES Act? Many businesses took advantage of the programs included in the CARES Act (Payroll Protection Program and the Economic Injury Disaster Loan) so they could continue to pay employees and stay in operation. Consideration should be given to the treatment of these items and how they should or shouldn’t impact cash flow projections.
- Valuators may need to look beyond COVID-19’s impact on a subject business, and also look into the impact on its supply chain and largest customers. These could also have a considerable impact on its operations.
- Historical transactional data, without the impact of a pandemic, may not be able to be relied upon. Current transactional data may be based upon forced sales or may not include businesses worthy of selling at a high multiple. I believe any transactional data relied upon should be given ample scrutiny.
- Risks (potentially impacting the cost of capital) were brought to light by COVID-19, and may need to be factored in going forward. More risk means a higher cost of capital, and all other things being equal, a lower value.
- Site visits. These were easy and straight forward prior to COVID-19, but business valuators need to consider how to handle them when the business may not be open. Live virtual meetings and tours have been suggested as one possible solution.
These are just a few of the considerations that may impact a business valuation in the COVID-19 era. As I said before, I don’t have answers to how the value of your business may be impacted without knowing specific facts and circumstances. Many of the items discussed above make it more difficult for businesses to operate as they have before. The impact from COVID-19 may cause the value of your business to be lower than it was previously. However, on a positive note, if your business is overdue for some ownership transitions, you could take advantage of the current opportunity for tax-efficient estate planning transfers associated with the lower value.
Should you have questions regarding the possible impact of COVID-19 on business valuations, please contact me, T. Eric Blocher, CPA, ASA, CVA, Principal & Director of Business Valuation Services with McKonly & Asbury at email@example.com. I’d be happy to discuss your current needs and further information on the business valuation services that McKonly & Asbury can offer your business during these unprecedented times.