How We’re Thinking About Covid-19, The Future, And Business Valuation (Part 2)

Previously we discussed the before Covid-19 and during Covid-19 periods.

After Covid-19

This will be characterized by the removal of social distancing requirements and a return to “normal” (Phase 4 of BC’s Restart Plan). 
We expect business results will improve substantially after Covid-19 relative to the during Covid-19 levels. 
The world after Covid-19 will be different in certain ways.  Examples include:

• Working from home may become more accepted and prevalent.  Fixed costs for companies may decline.
• Companies may carry more inventory to buffer against supply chain disruptions. 

These shifts will impact the value of affected businesses.  While we are monitoring these trends, at this point, the impacts are largely unknown.  As such, we generally do not factor any such shifts into our valuations.  As time progresses and these trends and their impacts become more evident, they will be factored into valuations as appropriate. 
From a valuation perspective, traditional cash-flow based approaches will generally continue to be most appropriate for valuing operating businesses (although this is assessed individually for each business).  As the value of a business is in its future cash flows, the majority of value of an operating business with intangible value (goodwill) will relate to the after Covid-19 period.  This remains true even for valuation dates during Covid-19.

How we have considered Covid-19 in operating business valuations

In addition to executing our normal valuation process, where practical, we are taking the following additional steps:

• Understand the impacts Covid-19 is having and potentially will have on the business. 
• Assess whether the business is a going concern or not, given the Covid-19 impacts.
• If the business is a going concern, select an approach consistent with the expected economics of the business, post-Covid-19.
• Adjust this value for the cash flow impacts (e.g. lower revenues, government subsidies, etc.) of the period from the valuation date to the estimated end of Covid-19.

Questions to consider

These are some questions you should consider when advising your clients and working with valuators:

• Have the impacts on the business of the during Covid-19 period been included?  Is this separated from the cash flow-based value otherwise calculated?
• Have the cash flows and/or balance sheet of the business been adjusted from historical levels to account for the expected changes to occur in the after Covid-19 period?
• Have emerging trends (such as working from home, etc.) that impact the business in question been considered?