The COVID-19 pandemic has had wide-ranging impacts on economies across the globe and the valuation of businesses is no exception from its effects.
To guide your business & decision-making in these unprecedented times, Titan Partners have narrowed these potential impacts into two broad factors to consider: the external impacts and your own business model. We briefly discussed these below.
The current value of a business is impacted by a number of external factors. A greater level of financial market volatility and the higher level of uncertainty as the pandemic continues to unfold in some economies while a recovery begins to take shape in others is an important consideration in these unprecedented times. Businesses with exposure to international or interstate movement of goods or people would have likely experienced a decrease in sales and profits, resulting in a reduction to the pre-COVID-19 value of those businesses, all else being equal. However, the impacts are likely temporary if your business model is shown to be sustainable once restrictions are lifted, e.g. hospitality, tourism exposed sectors. Once commercial activity returns, an improvement in valuation will likely follow. Consider how your business has performed against your peers in the sector.
Those who have responded quickly to changing circumstances or able to pivot towards alternative sources of income may hold their value, even experience an increase in value or have access to a new revenue stream.
It’s important to consider these external impacts over a short vs long-term timeframe.
For example, some businesses may have experienced an extraordinary surge in sales, (think toilet paper manufacturer, or delivery drivers) in the early months of the pandemic due to a sudden rise in demand. However, how sustainable is that growth? Will those sales disappear once COVID-19 restrictions are removed or a vaccine is widely available? One-off gains should be excluded, in the same way one-off pandemic-related dips in income should be viewed as an abnormal event, in light of underlying qualities of the business. The sensitivity of the business from any new restrictions in the near future or abrupt disruption to domestic and international borders should also be take into account, such as the second lockdowns in Victoria or South Australia.
Without a doubt, those with a sound business model will likely revert quickly to their pre-pandemic valuation as the core business operations and strategy remain robust. Businesses with quality management, a unique offering with few competitors, strong long term trends and underlying growth prospects will always remain attractive to a potential acquirer or investor. Similarly, businesses with a unique product/services offering or proprietary, patented technology are also highly valued, whether we’re in a pandemic or not.
To summarise, ask yourself:
- To what degree has COVID-19 impacted my business’ sales and profits? How has it affected my customer base and supplier network?
- Are these impacts on my business temporary or permanent? How am I placed to respond should restrictions or border closures be reinstated?
- How long will it take for my business to recover? What are the main risks to that recovery?
- Will my business return to pre-pandemic levels, or will there be a “new normal” for an extended period?
- How has the competitive environment of my business changed during this pandemic?
- How can I best position my business to be successful following COVID-19?
Bear in mind that when valuing any business, a major determinant is the ability to generate future earnings. Your past business performance is inconsequential if it is not indicative of the future. Are you pondering ways to grow, support existing operations or potentially sell your business?
Contact us here for a complimentary discussion, we’d be happy to guide you.
