COVID-19 and the Impact on Business Valuations

by Jun 10, 2020

The COVID-19 pandemic has affected everyone’s lives. Entire nations have had to shut down to help contain the virus, and updates about how to combat the illness are constantly being released. If you own a business, you may be wondering how the coronavirus has impacted your company’s valuation. The truth is it varies from business to business and industry to industry. Here’s what you need to know about the situation:

The Must-Know Info Regarding Businesses and COVID-19

A number of businesses and industries are struggling under the closures created by COVID-19, and that includes the workers. Unemployment rates reached 14.7% in April, the worst it has been since the 1930’s, during the Great Depression. Even with resources like the Paycheck Protection Program, some businesses are having trouble. The PPP loans in particular were only designed to cover payroll costs for 8 weeks. We’re reaching that time limit for some businesses.

Ripple effects of the virus will be felt in the coming months regarding unemployment rates, but businesses will feel the effects for years to come.

It’s also important to note that each state and city is handling reopening differently. This means that real estate and location are absolutely playing bigger roles than ever before. Each business is held to different standards based on locale, but many have had to put mask and social distancing requirements into place to help stem infection rates. Even companies that have been allowed to reopen could be stymied by the necessary requirements.

How Was Your Business Affected?

As mentioned previously, different industries were affected differently by COVID-19. While some companies saw growth, others had to shut their doors, perhaps permanently. Here are a few different ways your business may have been impacted, what to expect, and how valuation may have changed.

Business Wasn’t Affected At All or Only A Little

Has, except for the addition of masks, social distancing, temperature checks, remote work where necessary, and other precautions, your business continued on just as it did before the pandemic began? If so, your business valuation may have not changed at all.

It’s still important to chat with a professional, as there are always risks, and because this varies from state to state. An industry that was not impacted at all in one state, could have been a bit more affected in another, due to varying closure requirements.

You’ll also have to consider the future. Your plans for return to normal post COVID-19 or your ideas for the infrastructure could impact the final number. Strategies here could be affected by your location, so be sure to keep up to date on the latest developments in your area.

Your Company Has Seen An Increase in Sales or Business

In some cases, businesses have actually seen an increase in sales and are set to outperform themselves compared to previous years. Some examples of these industries include bookstores, online grocery stores, and sanitary paper product manufacturing. Other businesses, including grocery stores and delivery services like Papa John’s, were hiring to meet demand.

Of course, this can also affect business valuation numbers, but the future has to be noted. Will growth continue after the pandemic passes? How long will the particular industry be impacted by the coronavirus? A 12 month projection can help determine business valuation here.

Your Company Has Been Affected or Severely Affected

A number of businesses fall into this category. From day spas to sporting good stores to full service restaurants, industries all over the world have been severely impacted by COVID-19. Some businesses in this situation may not recover.

Again, how a business was affected varies, from industry to industry, from locale to locale. Some businesses were required to close in mid-March. Others not until April. Some businesses, like restaurants, didn’t have to fully close their doors but could operate on a limited level.

Companies have also pivoted their offerings in an effort to grow or maintain cash flow. Fitness centers, for example, have been offering online courses or Zoom lessons to its members. Some restaurants have opted for food trucks and other businesses, such as wineries, have started subscription delivery services.

Business valuation for companies that fall into this category will vary quite a bit. Cash flow will be the first consideration, but businesses also need a strong recovery strategy to help keep their valuation up as well as keep their company running in the months to come. A 12 month forecast can be extremely beneficial to see what the market holds for businesses struggling at the moment. You should be working with professionals to help ensure you’re not depleting your capital during this time as well.

Questions to Consider

Whether COVID-19 has thrown your business into chaos or you’ve been minimally affected, there are a few questions you need to be asking (that we’re asking as well) including

• How has your business been affected overall?

• How many people have you had to lay off, furlough, or cut the salaries of?

• How does the locale of your company affect the current and future operations?

• What’s the strategy for reopening or reopening fully?

     ◦ It’s suggested you write out a 12 month recovery/reopening plan for your business.

• How long will the disruption in operations last?

• How has the target audience been affected?

• How can cash flow be sustained or issues in the cash flow be mitigated?

• Has there been a disruption in business? And if so, to what level?

The situation around COVID-19 is changing rapidly. Business valuation at this time though can help you get on top of your cash flow and make serious plans for your company’s future.

Has your business been affected by the coronavirus? Are you curious about your business’s future, or your exit plan? Don’t hesitate to reach out to us.