The coronavirus pandemic has given business owners and entrepreneurs a different perspective on how to navigate the “new normal” of business relations. As uncertainty and volatility continue to plague business dealings of all kinds, many wonder where business valuations fall into the mix. Financial markets and the global economy have undoubtedly suffered, so understanding the direct impact on valuations during this time of disruption is crucial. What is the fair value of companies? Are some companies achieving better valuation results from COVID-19? These questions are thought-provoking and important to address.
Private equity experts have been questioned incessantly over the last several months to weigh in on the pandemic and the ramifications for valuation impact. Assets like equipment and real estate have certainly taken a hit since the start of the pandemic, and this directly influences a company’s value. With the goal of taking informed actions, understanding returns and risks, and satisfying regulatory requirements, investors are looking for guidance.
The following are some of the key factors to keep in mind when wrapping your head around valuations during the COVID-19 era:
- The ability to value illiquid assets is extremely difficult right now, but can absolutely be done
- Individual transaction declines do not necessarily dictate distress in the whole market
- The purpose of the valuation plays a major role in determining how much of the market’s volatility to consider
- COVID-19 can directly influence margins and growth rates, so cash flows are impacted accordingly
- Adjustments may be necessary to account for movement in discount rates
- A sensitivity analysis and a scenario analysis will come into play much more frequently to account for the pandemic’s role
- Expect valuation ranges to be wider than what is typically seen
Valuation experts are required to consider all three valuation methods, however, COVID-19 means that some may be more appropriate than others. It is important to take this into account when determining whether the market, income, or asset method makes the most sense. For instance, since the income method makes projections about future financials (typically over the course of the next five years), it may be the most useful one to use. In doing so, the valuation will be able to model how a business will perform in the future based on individual years. This will create the option to predict how and when a business can get back to “normal” over the course of the next several years.
Considering the unpredictability of the current economic environment makes it much more challenging to conduct a business valuation. Nevertheless, taking the above factors and pairing them with the right valuation method will play a major role in obtaining as accurate a valuation as possible. These times are certainly atypical, but adjusting practices to meet these changes is both important and achievable when working with the right valuation experts.
At Ellrich, Neal, Smith & Stohlman, P.A., our trained valuation analysts have the qualifications and experience to value a business for a variety of purposes, including the purchase or sale of a business, divorce of an owner, estate and gift matters, business and contractual disputes, eminent domain condemnations, and to assist in financing.