News & Insights
Valuing a Business in the COVID-19 Era
August 5th, 2020
By Jeff Allen |
On November 17, 2019 the earliest confirmed case of COVID-19 was made in China. At the time, the virus was not recognized as a new virus. On January 8, 2020 scientists in China announced the discovery of a new coronavirus. Just over two months later in March 2020 governments and countries began shutting off economies and citizens began flocking to their homes for shelter. Fast forward to today and the effects of COVID-19 have been far and wide. Many businesses have been shaken, halted or even eliminated in just a few short months. Many business owners who were once considering a possible sale are retrenching, waiting or even wondering if a sale can ever take place. Further, if a business owner were to go through with a sale, how would you value operations in such an irregular time? Fortunately, there is a solution.
While businesses come and go, many still remember the 2008-09 Great Recession. Like the current pandemic atmosphere, many businesses were shaken, halted or even eliminated. History has shown time and time again that hardships come and go. The Dot.com bust of 1999-2000, the crash of 1987, and the Great Depression are all reminders that good times come and go. Each economic disaster also serves as reassurance that business goes on. Businesses are still bought and sold. A good business valuator has studied and learned from past economic oddities and is able to apply lessons learned to the times we live in today.
Valuation is often termed a “prophecy of the future.” The theoretical concepts involved in valuing a business entity during good times remain unchanged even in bad times. Looking to the future is where value in a business lies, not just the past or current. If the current business atmosphere is expected to only be temporary, then business value should remain like that before the economic hard time began. If, however, the atmosphere has truly changed in the future for a business, then value may indeed have suffered (or increased). Looking only to past financial performance is never the appropriate way to assume how the business will look in the future. While the past serves as a guide, the future is really meant to be determined via a quality forecast.
The best forecasts of the future are based on honest and reasonable assumptions made in good faith. Hypothetically, if business has been steady for a decade and after the COVID-19 pandemic restrictions lift, there are no real compelling reasons to assume the industry or economic atmosphere won’t return to normal, then why would business value be decreased based on bad financial results that occurred during COVID? A buyer, while interested in the past, is buying a business based on what will happen for them in the years to come.
If the key to valuation is the future and a reliable forecast, how is a reliable forecast built? Forecasts are defined as a prediction or estimate of future events. A good forecast isn’t just a wild guess, but rather an honest estimate of the future based on known circumstances. For example, if construction on a new factory underway it’s reasonable to predict capacity increases in the future and thus increased sales, cost of goods, utility expenses, etc.
Trends in the industry should also be considered. If the business in our example produces film for cameras and the industry trend shows the product in decline, the forecast should confirm such trends. In addition to company specific and industry specific events and trends, a good forecast considers the national, state and regional economic conditions and trends. Economic forecasts calling for overall national growth certainly affect a businesses future growth prospects much differently than a forecast calling for a long and prolonged recession. A good valuation analyst will have the tools to be able to assess company specific, industry and general economic conditions and how they affect the individual business.
If you’re in any of the situations above or think a business valuation may be something you could benefit from, it may be time to reach out to the professionals at Maner Costerisan.