Business valuation has never been more interesting than in 2020 and 2021. The ups and downs created by COVID-19 and the varying responses by politicians and the business community have created quite a roller-coaster. I find many of my clients, bankers, business owners and their advisors asking:
“So, where are we now?”
The current belief appears to be that the worst of the virus is behind us and we are moving into a post-COVID future in business and business valuation. It appears that the high-risk period caused by the coronavirus is behind us. If this is the case, when all things are equal, there will be little to no downward assessments when thinking about the reactions to future effects from COVID-19. Let’s hope for many reasons this optimism turns out to be warranted.
While each business and every business valuation is different (after all, that is why we do the work), I can break the current environment down into three classes.
Group One – Nothing Happened
Of course something happened: shut downs, employee safety or work from home issues, supply chain issues, new signage everywhere, and screens were just a few of the most visible things. But in the “Nothing Happened” group, the underlying company continued to deliver value to customers and clients. Any interruptions were brief and the business either made up the lost revenues or resumed right where it was on a monthly basis as soon as it was allowed to reopen or customers were allowed to leave their homes.
Companies in this category are many service providers like accounting firms, service repair companies, and basic essential businesses like grocery stores. These companies and businesses are being valued as they always were. In fact, many may have a higher value for having shown resilience in difficult times.
Group Two – It Got Really Good
Many industries and companies benefited greatly from the pandemic. For example, indoor signage companies, outdoor recreation, and clothing manufactures that produced masks quickly and liquor stores that supplied alcohol at higher rates than pre-pandemic, not to mention Zoom and tech companies of all stripes that made working from home and connecting with loved ones easier. Some of these businesses may stay strong in the “new norma,l” but many are likely to show 2021 as a bubble with exceptional results.
Valuation is always forward looking. After all, you would not make a personal investment that had paid 20% returns last year if you were told it was not going to pay anything in the future. That is the nature of value. Therefore, the issue in valuing these companies is estimating a likely future cash flow. In many cases, a review of past data can be a good indicator for a likely future cash flow. But, what about the company that doubled revenues and had 5 times the earnings of prior years? Determining a likely future cash flow for that company requires judgment. Otherwise, like the companies in the first group, the overall risk is likely to be viewed as being reduced. The likely future cash flow will (at worst) remain where it was pre-pandemic, and possibly increased post pandemic. These companies as a whole have increased in value.
Group Three – What The Hell Just Happened?
One of my favorite quotes is by the boxer Mike Tyson, “Everyone has a plan until they get punched in the face.” Group three is made up of companies that got punched in the face, and in many cases knocked out.
The results of companies that fall in this category can vary greatly depending on their location and specifics. For instance, a formal high-end sit-down restaurant in New York City would have been much more impacted than a mid-priced restaurant in an outdoor resort town that could do outdoor seating and take-out. But, all of these companies have reduced profitability to large losses. Many may never reopen. Many of the businesses in group three are in entertainment, tourism, and restaurant sectors.
Some of these companies are quite easy to value. As of a current valuation date, they have nominal or no value. Namely they may have value in the future, but they do not today.
However, others in this group are the most difficult to value as they have limped along and now have strong prospects for a banner year followed by a hoped for return to the “old normal.” Common sense says this is likely to be true but valuators are required to have a reasonable basis for their opinion.
Reasonable basis can come from many places. One of the easiest to work with is the monthly income statements that show returning revenues. Another source is well-prepared and supported projections that tie into economic and scientific data, which show a decline of the effects of the virus and a return of the economy. Again, the required evidence of a “return” is going to vary with the business and how hard the business was “knocked-out.” Yet, these companies now have a risk that they have not fully escaped. Therefore, most of these businesses will have a reduction in value from pre-pandemic for a while at least until projections hopefully become a profitable reality.
The United States and business in our country appears to be quickly returning to normal. Hopefully the vestiges of COVID-19 will quickly be left behind. But, business profitability, risk, and ultimately business valuation remains much more nuanced in a post-COVID world.
I’ve written more about COVID-19 and business valuation for BVC, the Business Valuation Resources publication, and NACVA QuickRead:
“Estimating a COVID-19 Marketability Discount for Small Businesses published in BVR Vol. 26, No. 11 November 2020. https://theartofbusinessvaluation.com/wp-content/uploads/2021/02/BVU1120-COVID-DLOM-GC.pdf
COVID-19’S Impact on Micro and Small Business Valuation published in NACVA QuickRead, September 23, 2020 http://quickreadbuzz.com/2020/09/23/business-valuation-gregory-caruso-back-to-basics/