COVID-19 Business Valuations – Glass Half Empty Or Half Full?

We have all heard the saying “it’s an ill wind that blows nobody any good”.

This is certainly true for family businesses.

Whilst some businesses have prospered as a result of COVID-19, others have unfortunately not been so lucky. From a valuation perspective, the critical question is – what are the longer-term effects on the business? Are the benefits obtained by some businesses in the short term maintainable into the future and conversely, can others that have been negatively affected recover, and if so, to what extent and how long will it take.

Invariably, the challenge in any business valuation is the assessment of risk associated with the estimate of future profits and cash flows. This has always been the case, pre or post COVID-19. The only difference now is the increased level of uncertainty, however, this is not a new phenomenon (for those of us who have been around the block a few times and remember the GFC and 1987 share crash).

What does this mean for the valuation of a family business?

• Historical profits may not be indicative of future performance

• Discounted cash flow methodology may be appropriate

• Range of scenarios should be considered to estimate cash flows

• Adopt a 3-way budget to estimate cash flows under each scenario

• Multiple should be adjusted to reflect the risk under each scenario

• Each scenario should be supported by a business strategy

COVID-19 has forced valuers to focus more closely on the future prospects of the business, which in reality, should have always been the case.

If you have a client that needs a critique of a business valuation, or any assistance with their property settlement, please contact John or Renee at DBS Accountants and Business Advisers.