While we do not have a crystal ball and while we do expect conditions to continue to evolve, we have developed a framework that has helped us approach valuations during this period.
This characterizes the time up to approximately the end of February where people’s assumption about Covid-19 were such that a large disruption to the economy was not expected. There are two major business assumptions of this period that impact valuation:
These assumptions may not be valid for valuations during Covid-19.
This period began in early March and will continue until social distancing restrictions related to Covid-19 are lifted. While no one knows how long this period will last, BC’s Startup Plan indicates it will last until a vaccine is developed and administered, effective treatments are developed, and/or there is community immunity.
The estimates on vaccine development are 12 to 18 months from May 2020, all going well. Based on this, we assume that the during Covid-19 period will last for 12 to 18 months. This estimate will evolve as more is understood about the virus and its economic impacts.
This period will be characterized by:
From a valuation perspective, we generally treat this period as a one-time adjustment to value otherwise calculated. What does this mean? In general, we calculate the value of the business based on the expected cash flows of the business after Covid-19, then adjust that amount for the cash used or generated during this period.
In the next article, we will discuss what happens after Covid-19 and what we’ve added to our valuation process to address Covid-19.