The impact of Covid-19 on business valuations

By Stuart Noland, Nolands Capital

The Covid-19 pandemic has irrefutably had a major effect on the global business landscape, shining the spotlight on business valuations during a time when investors are scrambling to understand the impact on their businesses.

As a result of increased uncertainty and performance volatility, valuations can no longer be taken at face value and need to be understood and interrogated to provide true value to clients. Each business needs to be uniquely assessed in light of the industry, sector and geography in which it operates.

While established valuation methodologies, such as discounted cashflow and relative multiples, still remain the most reliable and credible approaches, the devil remains in the details as to how these calculations are performed.

The assumptions applied in these valuations has become increasingly debatable, as short-term volatility continues to have a material impact on overall value. These assumptions need to be crossexamined by all stakeholders before a valuation can be finalised.

Established valuation methodologies are similar in that they place more emphasis on short-term performance, rather than on longer term outlooks. The consequences of this are further exacerbated when discount rates are inflated due to increased uncertainty. Where businesses have been significantly impacted by the pandemic, forecast periods should be increased to return the business to a steady-state, and multiples should be based on “normalised, sustainable, maintainable” earnings. Similarly, the peer-set of any relative valuation methodologies should be interrogated and adjusted accordingly to normalise for these differences on a riskweighted approach where possible.

The importance of effective scenario analysis, which results in a reasonable valuation range rather than a single number, provides stakeholders with greater insight on which to base their decisions. Careful attention should be paid to the date of valuations performed, as key assumptions (including market data) remain volatile. Valuations should constantly be updated using the latest available information to ensure they remain relevant and fit for purpose.

Published: M & A Newsletter, No. 02 Spring 2022 l Photo: WitR - stock.adobe.com