The Future, And Business Valuation

Is a business still a going concern with Covid-19?

As valuators, we always consider whether a business has more value continuing to operate or in its net assets, if they were to be sold.

A going concern approach means that value is maximized when the business is sold under the assumption it will continue to operate.  Businesses can be valued using a cash flow-based methodology or an adjusted net book value methodology. 

A liquidation approach means that value is maximized by liquidating the net business assets or that the company does not generate a sufficient return on the shareholders’ investment, and that the company will not continue operating.

With Covid-19 upon us, we are considering the following factors in determining whether a business will continue as a going concern:

  1. We consider the range of values of the business when the economy normalizes after Covid-19.  The higher the amount of goodwill, the more likely the business will continue to operate. 
  2. We consider what the potential costs are to the business to operate during Covid-19.  The higher the negative cash flows during Covid-19, the less likely the business will continue to be a going concern.
  3. We consider the competitive advantages and/or startup costs of starting a competing business.  Will these competitive advantages exist after Covid-19?  Can a purchaser startup a competing business after Covid-19 without taking the risk of operating during Covid-19?  The more durable the competitive advantages of the business, the more likely it is a going concern. 
  4. We consider the existing balance sheet of the company at the valuation date.  For example, we need to understand whether the company has cash to continue to operate during a period of low cash inflows, and if there is any debt maturing, whether there is any risk of non-renewal.  The greater the cash reserves and the lower the debt, the more likely the company is a going concern.
  5. We consider any government programs that may modify the above considerations.

Even if a business does not have sufficient liquidity at the valuation date to “weather” the Covid-19 storm, it still may be a going concern.  A purchaser may be able and willing to inject capital into the business to own the business after Covid-19 (which in turn, would have a negative impact on value).
The future value of the business after Covid-19 will be linked to what the business does during Covid-19.  A business may need to operate with negative cash flow during Covid-19 to preserve its value after Covid-19.  This can happen for many reasons, including the retention of key leases, key employees, and customer relationships and preserving the value of a brand, to name a few.  The above factors must be considered in conjunction on an approach.

In resolving matrimonial matters, the parties may need to consider the practicality of operating the business over the next several years: 

  1. Is it likely that the business will need a capital injection to continue to operate?  How will that be considered in the division of assets? 
  2. Does the business need to continue to operate (even at a loss) to preserve its value?  If so, how will that be factored into guideline income?