The Effect of COVID on Business Valuations

To arrive at a business valuation, it has always been necessary to drill into the detail of historic financial information and projections into the future. Now it is necessary to factor in the impact of Covid on past and future performance, the effect of Government support schemes and the considerable additional debt that may have been taken on, paying special attention to the specific industry the business operates in.

Methods of valuing a business

Valuations are more commonly based on one of the 3 following bases of valuation:

• Apply a multiplier to a projection of estimated future maintainable earnings
• Net assets market value of assets and liabilities at the valuation date
• Calculating the net present value of cash flows from a set of financial projections

Some of the factors to consider

Sector: Not all businesses have been negatively impacted by Covid. Some have actually experienced significant growth and prosperity.

Valuation date: To determine the timeline of events and what was known or knowable at the valuation date.

Subsequent events: Timeline of subsequent events caused by Covid, explanation of each event and the impact on performance and value.

Valuation methods: Consider the future performance of the business until conditions are no longer affected by Covid.

Cash flow: Look at cash flow to ensure that there is enough future money coming in to maintain trading, particularly now that government support has wound down.

Financial projections: No one can really be certain how long the effects of Covid will continue and it may be necessary to run with different predictions. How reliable are future projections?

Financial reporting: Covid may have resulted in the impairment or permanent reduction in the value of the assets e.g. fixed and intangible assets of a business.

UK Economy: The magnitude and duration of the UK recession, triggered in part by Covid, and the prospects for an eventual recovery.

Underlying cost of debt: Increases reflecting the greater risks and uncertainty in the Covid era.

Multipliers: Historic multipliers may be out of date in the new Covid age.

Viability: In the current Covid environment, a change of valuation basis may be required to a net asset approach if the prospects for the business are less certain and questions arise regarding the viability of the business.

Marketability: In the current Covid age, there may be doubts regarding the marketability of the business because of a decrease in market activity and pool of interested buyers.

In summary, Covid has changed the standard methods of valuation and forced valuers to reassess their approach.

Case Example

Just by way of a very simple example, we recently prepared the valuation of 2 butchers’ shops for a divorce case, and it was clear that during the years 2020 and 2021 there had been exceptional levels of trading. In the financial year 2020, there was panic buying around February and March. Also, the social distancing rules introduced by the government, led the butchers’ shops to put in place appropriate social distancing measures that offered better security to customers than those offered by the supermarkets. It was also noted that gross profit margins during that period decreased due to core materials increasing in cost.

An experienced forensic accountant will be able to investigate and identify the impact of Covid on the business and make the necessary adjustments to arrive at a meaningful and accurate valuation.

At Davidsons Forensic Accountants, we prepare business valuations for both small and large businesses or groups of companies with overseas holding companies and/or subsidiaries. If you need a business valuation, please get in touch.