Has your business been impacted by COVID-19? If so, do you know how it is impacting the value of your business? These are a couple of questions business owners may ask during the current economic crisis. A business valuation expert can help answer these questions and provide guidance to protect and build your business.
Although the value is constantly evolving, here is how a business valuation professional looks at your business during this period of uncertainty. By learning what factors may be changing, you can understand the impact on the value of your business.
Questions to Identify the Impact
First, a valuation professional looks to understand what may be impacting the value of the Company. As such, the following questions help identify the impact of COVID-19 on the business.
- Which sector and industry does the business operate in?
- Where is the location of the business geographically?
- How is the business continuing to deliver its products and services?
- Are the business’s operations experiencing disruption?
- How long do you anticipate this disruption to last?
- Is your business reliant on many customers or a few customers?
- If your business works with suppliers, is the business reliant on a certain supplier?
- How have cash flows been impacted over the last few months compared to the last year?
- What is the capital structure of the business?
- What was the debt leverage of the company prior to COVID-19?
Factors Impacting the Value
The valuation of the Company can be complicated because much information about the impact of COVID-19 may not yet be known or quantifiable. One of the biggest issues to assess is the financial impact of the Company over the next month or year. So, let’s look at a list of factors a valuation expert will consider when assessing the value of your company.
With deterioration in general economic conditions, a business’s value can be negatively affected. Economic downturns often make it more difficult for a business to access capital. This is just one example of how macroeconomic conditions can impact a business and its value. Other conditions may include unemployment levels, inflation, and price levels.
Industry and market conditions
Next, an analyst will conduct an analysis of the industry in which your business operates. This is known as an industry risk assessment. Has competition in the industry increased or decreased? What about a decline in multiples or metrics of peers, or a change in the market’s products or services? Is the business experiencing an increase in regulatory compliance or political development? The industry risk assessment impacts both the discount rate and growth rate of the company.
There are many costs that may see an impact during the economic downturn. Costs like raw materials, labor, etc. may be impacted and thus have an effect on earnings and cash flow.
Overall financial performance
An expert will assess the financial performance of the company. This includes whether cash flows, revenue, or earnings are increasing or decreasing. They will then compare the actual with the projected financials.
Debt leverage and Capital Structure
Looking at the debt leverage and capital structure of the business will provide an analyst with an assessment of the health of the company. What capital is currently available to sustain operations? What other debt does the company have or may incur? This can include whether the small business applies or receives assistance from the government. Assistance may include the Economic Injury Disaster Program or the Paycheck Protection Program.
Other relevant entity-specific events
Lastly, there are a variety of other relevant entity-specific events that may apply. This includes but is not limited to management or key personnel changes, the business’s competitive strategy, changes in customers/suppliers, and the risk of bankruptcy or litigation.
A valuation analyst will measure the risk of all these factors and how uncertainty is changing. Keep in mind, estimates of the impact of COVID-19 on your business value will change in near real-time as information and economic conditions change.
Overall, COVID -19 has likely had an impact on the value of your small business. This impact can have a wide range. At one end, a business may see a decline that is minor and temporary. In the middle, a business may see a decline that is major or permanent. On the other end, a business may be experiencing a period of growth that increases the value of the business. Where your business falls will depend on an ongoing assessment of many factors. Several of which were highlighted above. In addition, a variety of scenarios may be run to determine the best case, worst case, and middle-ground for your business.
As a business owner, you may have many questions and new problems to solve. Peak Business Valuation is here to help you understand and navigate this unexpected and complex situation. Questions are always welcome! Please reach out via email or through a phone call.