The Impact of COVID on Business Value

Written by Marcus Hill
June 3, 2022

“What impact has COVID had on the value of my business?” This is a question on many of our clients’ minds as of late and is often raised when we are talking about how to effectively approach a business valuation in the post-COVID era.

The impact of COVID on the value of a business isn’t as cut and dried as some may think, and businesses face difficulties in achieving accurate valuations in what has recently been quite unusual and uncertain circumstances. The insights on how COVID affected the business’ earnings in the past few years should never be overlooked or you will end up undervaluing or overvaluing your business.

Marcus Hill, Partner at Elements Advisory Group, shares his insights on what you should be looking at when it comes to valuing a business in a post-COVID era. Watch the video below.

 

What impact has COVID had on the value of my business?

This is a question on many of our clients’ minds as of late and is often raised when we are talking about how to effectively approach a business valuation in the post-COVID era.

The impact of COVID on the value of a business isn’t as cut and dried as some may think, and businesses face difficulties in achieving accurate valuations in what has recently been quite unusual and uncertain circumstances.

The insights on how COVID affected the business’ earnings in the past few years should never be overlooked or you will end up undervaluing or overvaluing your business.

Let’s look at it this way. For businesses that faced a decline in profits as a result of the COVID lockdowns, using a traditional valuation method of the historical multiple of earnings may undervalue the business, as it fails to consider the opportunity to recover when the market starts to normalise, and demand begins to increase.

On the other hand, businesses seeing an increase in sales because of COVID-related demands may overvalue the business by not looking at how the revenue and profits may change when the market settles down and the demand that triggered the sales increase starts to decline or slow.

Looking at the historical multiple of earnings as it is, is dangerous territory in a post-COVID world. When determining the value of your business, you should be considering elements in the overall picture with the many COVID-related factors that have affected earnings, and as a result, have affected business value, and how you can accurately articulate value.

Elements like abnormal income items and incentives such as government subsidies including JobKeeper, PAYG rebates, interest deductions, economic stimulus measures, and the list goes on. All of these “abnormal income items” will influence a proper valuation, and if they are not considered, you run the risk of overvaluing your business.

We also need to consider the effects of cost-cutting measures during COVID, such as rent deferrals and owners switching off salaries for a period of time, which will provide inaccurate forecasts when owners start receiving salaries again if they haven’t already done so.

All of these elements should be considered so you can accurately articulate the impact of COVID on the earnings and value of the business, so you’re not over or undervaluing.

These are just a few of the many key considerations that have distorted valuations in the past few years and will do so for the next 3 to 5 years.

Of course, each business is different, and circumstances are often unique. But if you are planning to sell now, or in the next 3 to 5 years, or perhaps you just want to know the real impact COVID has had on the value of your business, get in touch with our specialist Advisory & Valuation team at 07 3878 9181, or email us at admin@elementsag.com.au.

 

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TAGS: Business Value, value, video
Marcus Hill
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