The Impact of COVID-19 on Business Valuation

Since arriving in the United States in early 2020, COVID-19 has impacted nearly every aspect of our lives. We’ve gone from lockdowns to re-openings and back again. For business owners, this is a time of extreme uncertainty with operational risks and opportunities. With so much ambiguity, how can one understand where their business stands and what move to make next?

Understanding Your Business Value

A business valuation expert can help you understand what your business is worth even in these unprecedented times. As we’ve shared in a previous article, there are three common approaches to determining the value of your business: an asset-based approach, income-based approach and market-based approach. Each approach has pros and cons depending on the size of your business and your industry, but no one approach stands out during the COVID-19 pandemic.

The Discounted Cash Flow Approach

Business valuation experts have found the Discounted Cash Flow (DCF) method, an income-based approach, to be the preferred tool for valuations during COVID-19.

According to Investopedia, DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

When conducting projections, it is important to consider multiple scenarios in relation to COVID-19. Using multiple projections such as the virus being under control in three months, six months or a year can show how much resiliency your business has.

Beware of Market-Based Approaches During COVID-19

The market-based approach works just like it sounds – a business valuation expert reviews the market to find similar, recently sold businesses, and then uses those findings as benchmarks to value a business.

This approach is not recommended during times of extreme uncertainty and flux (such as global pandemics) because of the unstable condition of the market. Similar businesses may currently be selling for far below or far above their value, leading you to incorrectly value your own business assets.

Other Considerations for Valuations

Industry and Business Details

COVID-19 did not affect all businesses or industries equally. For example, if you owned a restaurant that already had a robust online ordering and delivery system, you were likely less affected than restaurants that had to rely on third-party services like Uber Eats or DoorDash to deliver to customers.

Intangible Assets

Aspects of your business such as brand recognition and goodwill can be powerful motivators for customers. During the COVID-19 pandemic, customers began paying closer attention to how businesses treat their employees and began rewarding businesses making positive efforts with their patronage. Emphasis was also placed on the mantra of ‘shop local’ to support small businesses in one’s own neighborhood. These feelings of goodwill towards a business can be a valuable asset during an acquisition or merger.?

How to Understand Your Business’s Value during COVID-19

Even during stable times, business valuation is a complicated matter that requires an expert eye. Now more than ever, it is critical to find a valuation expert who understands how COVID-19 affects your business and industry in order to lead you to an accurate valuation.

Sherry Jordan, CEO and founder of Jordan Financial Consulting and Coaching, has more than 20 years of experience in public accounting including business valuation, litigation support, financial forensics and divorce mediation. She is a Certified Valuation Analyst (CVA) with experience conducting valuations for businesses large and small in a variety of industries.