Business Valuations – assessing the short-term impact and the long-term value!


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Business Valuations – assessing the short-term impact and the long-term value!

COVID-19 has affected every business in some way, and there would be no doubt that every business owner has given some thought as to how it has affected their business and how will the value of their business change.

There is no easy answer, there are so many considerations and variables, many outside the control of the business owner.  They are feeling the effects of the pandemic now, in the short term, but may be wondering what the long-term effect be.  It may not be what they think!

One year later

In June 2020, dVT Group published a newsletter discussing the impacts of major disruptions like COVID-19 on business valuations and related transactions.  At that time, we expected such disruptions to be relatively short-term, even though the impact on specific industries might have varied.

Fast forward to September 2021, and considering that the pandemic has continued, and its impact worsened, uncertainty around future economic and trading conditions has increased.  This has had a material impact on the approach to business valuations.

The role of the business valuer

Determining the value of a business can be quite complex in normal times, but during COVID-19 it proves to be very challenging, given the growing and constant uncertainty and the differences across industries

A good business valuer and advisor will obtain a deeper understanding of these variables and be able to differentiate between the short-term and the long-term effects of this pandemic on the business.

The right approach to Business Valuations

Just as a basic refresher, business valuations are all about the expected cash flows of that business in future years (even if they are sometimes calculated based on past performance).  Now, more than ever, the growing uncertainty about the future means that a valuer will need to continue to make certain adjustments to the valuation process to allow for the ongoing impact of such events.

Those adjustments are going to depend greatly on the relevant industry – in particular, how hard it has been affected by the pandemic, but more importantly how long that impact is expected to continue.

As previously discussed, a short-term impact can be addressed relatively easily by placing less or no reliance on the result for that period of time.  A longer-term impact is not so simple to adjust, though, and the valuer needs to think about a number of factors that will influence the final opinion.

These might include:

  • Adjusting likely cash flow projections – if the impact is expected to last longer, it may be considered more riskier to project cash flows too far into the future. Last year, we (perhaps naively) considered that the impact would come and then go.  However, the past few months have shown that repeated surges and subsequent lockdowns and other restrictions only create more uncertainty about the ability to recover from the pandemic impact and return to previous trading levels.
  • The uncertainty of how long? It is also the speed at which the pandemic has impacted various industries that in turn creates uncertainty about expectations of future trading – the “roller coaster” effect. How can you plan for the next year when you don’t know whether another strain of COVID-19 will hit Australia?
  • Adjusting discount rates for calculating net present value of cash flows – these rates include risk factors for the likelihood of achieving projections – if those become riskier, the discount rate increases and the net present value then decreases.
  • Discounts for liquidity and marketability – it’s a normal valuation process to consider whether the value of a business, especially one in the SME space, should be discounted for less ability to sell these businesses compared to, say, shares in listed companies. Uncertainty around future trading will of course create more hesitancy among potential buyers, decreasing the liquidity and marketability of those shares and increasing any discounts in that regard.
  • Impact of related sectors – Even if the business operates in a sector that may be less affected by COVID-19, a prudent valuer would still be considering the impact of related sectors (e.g. potential suppliers and customers). It would be difficult to be assured of future cash flows if that business was reliant on another sector that was being more harshly impacted.  By way of example, one of our clients was unable to import goods from overseas using the traditional aircraft cargo methods but had to bring them in by container ship.  Not only did this impact their expenses, but it created time delays in getting goods ready for sale which also then impacted their revenue lines and cash flow.  Other businesses have been allowed to open, but because they couldn’t source raw materials were forced to reduce operating hours, also impacting on revenues and cash flow.
  • Financial reporting requirements: If your company is required to prepare and lodge accounts with ASIC, you may want to consider disclosure requirements in financial reports.  ASIC has highlighted key focus areas for financial reporting by companies for the 30 June 2021 year under COVID-19 conditions, including an expectation that directors will properly and reasonably consider future trading and cash flows.  Again, this will all influence the information that a valuer works with.

How does this affect the sale of a business?

Potential buyers will continue to be overall somewhat risk-averse, and this will likely be reflected in transaction values for the buying and selling of businesses.  That’s not necessarily bad news for everyone though, as it could open up some potentially attractive deals for buyers who may be more comfortable with taking this uncertainty on board.

But it’s not only potential purchasers of a business who might need to be considered – valuations are also carried out for other purposes, such as family law settlements, taxation, employee schemes, shareholders disputes, and so on.  The same risks and uncertainty apply here as well.

So where to from here? 

Regardless, our earlier recommendations still resonate – business owners should be looking at their future cash flows and operations and sitting down with trusted advisers to help them along that path.

It’s not just about discounting and adjusting business value based on the present situation.  Our accredited business valuer can help determine the right value of the business and the value of continuing the business in the long term.

Should you wish to talk about how we can help a business determine the value of your business, please contact Suelen McCallum on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations and insolvency (both corporate and personal).