Business Valuations are a topic that has been coming up more often in discussions with clients. The most widely asked question has been how will COVID-19 impact my Business Valuation and the sale of my business? Of course, the current corona virus crisis is unlike any time in recent history. Still, valuation experts have collected some insights from the 2008-2009 environment of uncertainty and turbulence to aid in their assessments.
I have come to the conclusion that we have to be mindful of key considerations and risk assessment regarding a Business Valuation. Projected financial information has now become a critical area that has to be understood and carefully analyzed in Business Valuations. Over the short term businesses are shifting projected revenues from the first two quarters out into the third and fourth quarters of 2020 in hopes the situation and the financials improve. Having a (V) recovery gives hope to this approach!
Businesses have to look at recurring vs non-reoccurring revenues as well as your clients and the impact the pandemic is having on their customers. In valuation efforts there may be a reason to extend the projection period to soften the blow of the pandemic period? Actual and expected revenues and earnings may have decreased due to the forced COVID-19 impact, thus allowing for the application of projection extensions.
Metrics such cash flow and cash burn are areas of focus and are looked at strongly during the valuation process. Potential buyers consider cash flow as the strength and survival of a business. As a best practice, the Business Valuation should include discussions on subsequent events and the known perceptions.
During the 2008-2009 crisis, the SEC provided examples that should be taken into consideration when completing a Business Valuation.
- Negative current events impacting industries
- Forecasts in consecutive periods not meeting expectations
- Downward adjustments to future forecasts
- Market capitalization of the business below book value
- Cash flow disruptions due to increased uncertainty
Whether to engage in a transaction Business Valuation now or consider alternative moves is a big decision for business owners? Our in-house Creative Business Services / CBS-Global business valuation expert has been using five full years of financials vs the past of three full years of financials. She is also placing different weight factors on the 2020 financial numbers knowing the pandemic was present. She continues to use the three valuation methods of income, market and asset in the software program.
Valuation standards require the analyst to consider all three valuation methods. However, the economic circumstances created by COVID-19 make some methods potentially more appropriate than others. Valuators are doing their best to consider the unpredictability of the current environment and evaluate key factors that may require more emphasis than a typical valuation. When buyers review current valuations prepared during this period, they assess how the valuator addressed these issues in their analysis for a possible transaction purchase.
If you have an interest in having a professional Business Valuation completed, please contact me directly to discuss.