The impact of Covid-19 on Business Valuations

The COVID-19 pandemic has irrefutably had a major effect on the global business landscape which has shone the spotlight on business valuations during a time where investors scramble to understand the impact on their businesses.

As a result of increased uncertainty and volatility of performance, valuations can no longer be taken at face value and need to be understood and interrogated to provide true value to clients. Each business needs to be assessed uniquely in light of the industry, sector and geography in which it operates.

While established valuation methodologies such as discounted cash flow and relative multiples still remain the most reliable and credible approaches, the devil remains in the detail as to how these calculations are performed.

The assumptions applied in these valuations become increasingly debatable, as short-term volatility has a material impact on overall value. These assumptions need to be cross-examined by all stakeholders before a valuation can be finalised.

Established valuation methodologies are similar in that they place more emphasis on short term performance, rather than longer term outlooks. This effect is further exacerbated where discount rates are inflated due to increased uncertainty. Where businesses have been significantly impacted by the pandemic, forecast periods should be increased to return the business to a steady-state and multiples should be based on ‘normalised sustainable maintainable’ earnings. Similarly, the peer-set of any relative valuation methodologies, should be interrogated and adjusted accordingly to normalise for these differences on a risk-weighted approach where possible.

The importance of effective scenario analysis which results in a reasonable valuation range, rather than a single number, provides stakeholders with greater insight on which to base their decisions. Careful attention should be paid to the date of valuations performed, as key assumptions (including market data) remain volatile. Valuations should constantly be updated using the latest available information to ensure they remain relevant and fit for purpose.