Your business is an important family asset, and you should understand the value of it. What impact has Covid-19 had on it? And is the impact long term?
Business value is determined by negotiation value is the price in a free market between an informed, willing but not too willing buyer and an informed, willing but not too willing seller dealing at arm’s length within a usual time frame. Business valuation and the achievable price are nor always the same thing. The value and nature of the physical and intangible assets in the business will impact the achievable valuation. Some buyers may be motivated to pay more if a synergy exists between the business and an existing interest. And sometimes, the asset may be worth more if broken up and sold separately.
However, to determine a business value in a pandemic requires a degree of investigation beyond the usual. You can’t ignore the impact of the pandemic and rely on previous results and financials. Even an optimist must be realistic, we cannot currently value a business as before, using the prior years performance as an indicator of the future.
Government regulations, including social distancing, business closures, border control, and travel restrictions, all have an impact on the economy and your business. The measures impact each business in different ways, and you need to be considered the impact on the industry and the particular business. Also, don’t forget to discount the impact of Government stimulus packages that provide extraordinary short-term results.
Valuations should consider present and emerging risks and the current and anticipated business environment. This analysis is then brought into the modeling and valuation result. COVID-19 creates unique considerations for consideration, including:
- the impact on the economy, industry sector, and individual business.
- The supply chain problems impact customer and suppliers, so identify possible the pandemic impact on supply chains.
- Normalise earnings and remove stimulus income measures.
Take the theoretical example of a cafe. The business has was established for more than 10 years and has a track record of profitable operations, with sales of $4-5 million and Earnings before interest & tax of $700-800k per year for each of the past 4 years. The business has a significant customer base and is located in a busy city location. Trade seems consistent to prior years until March 2020. Between March and September 2020, there was a 60% downturn with the business closed or working on fewer rosters. The business is moving back to l-usual trading, but this is not yet showing in sales. The impact of a downturn, in this case, might be discounted as the cafe seems to be returning to normal trading and profitability.
However, looking more closely at the customer base, it’s found that the business is located in a performing arts complex. Consequently, the business will likely have a significant downturn until the performing arts complex reopens to capacity or an alternative customer base can be found. Consequently, the business value may be adversely impacted.
Businesses are generally valued by one of two methods.
- The industry approach, here the sale of comparable businesses are used as a comparison.
- The maintainable earnings approach. This option is used when we have a trading history and potential Goodwill. This method establishes the projected earnings of the business and applies an earnings multiple, depending on the age and past performance of the business. The multiple usually ranges between 1 and 2.8.
If you are considering purchasing or selling a business and would like some advice, please get in touch with us for a chat.
Quote of the month
“Start by doing what’s necessary; then do what’s possible, and suddenly you are doing the impossible.”
Francis of Assisi