Valuing a business is a process and there are many factors to consider in determining the fair market value of a particular business. The current Pandemic leading to a global financial and economic crisis has led to valuations for companies to become quite volatile. Certain companies that are embracing technology have experienced growth and agile companies have managed to avoid liquidation but may take time to re-stabilize their cash flows. Other companies have not been as lucky – the loss of customers or decrease in demand for their products/services has negatively impacted cash flows and valuations.
Some of your clients may be faced with having to determine the value of their business during these times. This could be for tax/estate planning purposes, transaction purposes or dispute related purposes (e.g. commercial, shareholder or matrimonial disputes).
The value of an operating business (i.e. excluding investment or real estate holding companies) is represented by the present value of its estimated future discretionary cash flows plus redundant assets net of interest bearing debts. Major factors to consider when valuing a business during a Pandemic include (but are not necessarily limited to):
- What is the nature of the business and how it is positioned to respond to the current Pandemic?
- How resilient is the business and its management team? What is the current, medium-term and long-term impact of the Pandemic on the future earnings/cash flows of the business?
- What is management’s plans for dealing with the pandemic (immediate, medium and long-term)?
- Can management reasonably project future cash flows from operations over a 3 to 5 year period?
- How much time will it take for the business to stabilize or recover lost revenues and cash flows?
- Is the company expected to continue to operate as a going concern or would a liquidation valuation approach be more appropriate?
- Does management expect to incur any additional one-time or annual ongoing capital costs?
- Should the valuation methodology be income based, asset based or market based (or some combination thereof)?
- What is the impact of current uncertainty on the risk factors facing the business? What is an appropriate discount rate, capitalization rate or valuation multiple for this business today?
- What is the ability of the business to borrow (considering the current low interest rates environment)?
These are some of the major factors that must be addressed in arriving at a reasonable and supportable valuation in the current Pandemic environment.
By Ankit Varma, CPA, CA Canada, FCA ICAI
The author can be contacted at Ankit@vspltd.ca or linkedin.com/in/icaiankitvarma/
Disclaimer: Although every effort has been taken to prepare this material, no organization or person involved with this material accepts any legal responsibility for its contents or any consequences from its use. This information presented is for educational purposes only and does not represent independent professional advice. The material has broad application. Accordingly, it is recommended to have a situation reviewed by a qualified professional.