The world-wide economy is facing several unseen challenges under the influence of COVID-19, with several countries under full or partial lockdown, affecting businesses, and consequently, the revenue of several companies globally. As we have seen, the deteriorating COVID-19 situation is having a dramatic impact on world equity markets, with listed equity values and stock price worldwide in a downward spiral, similar or even worse than the declines last seen in 2008-09 at the time of the Global Financial Crisis. The decline in traded equity values on world markets is largely the result of two factors: A decrease in the future cash flow expectations for assets and a re-pricing of risk, which in turn reflects the uncertainty of the likely size and timing of the impact of COVID-19. These two factors will impact the private companies in the same way as it is impacting the publicly listed companies. Values of businesses have changed as a result of COVID-19 and the recent significant decline in equity values poses real difficulties for the valuation of businesses, shares and other equities in the current economic environment. The difficulty centres around the uncertainty of the likely future impact of COVID-19 on the earnings and cash flow generation capability of businesses, and the timing of any recovery from the impact of COVID-19 on businesses.
Corona Virus will have two type of impacts on the Company. The first type will be short terms which will affect the revenues due to lockdown and related obstacles. The second type will be the impact due to the change in way the businesses are conducted. The first one will not impact the valuation as one-time non-recurring losses are not considered while performing valuation. However, the second one will have a long-term impact and it can change the expected future cash flow which will impact the valuation in negative or positive way. Valuation is an important metric in determining the direction of a Company. Knowing the value of different business units of a company will help the management in understanding that which aspect of the business requires more attention. The following are the main reasons for business valuation post COVID-19:
Funding: Due to the shortage of revenues this year, most of the companies are looking towards bank and investors to seek finance. A comprehensive valuation puts the Company in the best position to negotiate with banks or other investors, as it lets them see where their money is going and, when paired with a projection based on the valuation, how it will deliver a return on their investment.
Regulatory Requirements: Due to the heavy losses faced by many shareholders due to fall in share prices amidst the Covid 19, regulatory bodies may come up with additional requirements such as quarterly or semi-annual valuation to create a better decision-making environment for shareholders.
Partnerships: Due to change in circumstances, business owners may need to partner with a different entity to create some sort of synergy and vice versa. If anyone is entering a partnership or LLC, a valuation report will help him determine the right buy-in price. Likewise, if someone decides to leave the partnership, a valuation forms the basis of an agreeable buy/sell agreement.
Better Planning: With a business valuation, the Company is empowered to make informed decisions critical for the success of its business in this adverse environment, such as ensuring it has adequate insurance, how much to reinvest in the business, and how to time the exit strategy.
Mergers and Acquisitions: If the Company plans to buy or merge with another company to tackle the increasing adversaries this year, a business valuation is instrumental in determining if the price being asked to pay is fair.
Sidharth Sinha, MBA, CFA
Bsuiness and Financial Advisor
Averroes Business Advisory and Services
