The impact of COVID on business valuations

EBITDAC is a facetious term for Earnings Before Interest Taxes Depreciation Amortization and COVID.

As a business owner, you may well ask “What is the impact of COVID on business valuations?” There are few businesses that weren’t affected in some way.

The Dual Impact of COVID

Firstly, COVID wasn’t detrimental to all businesses. Some may have seen revenues increased tenfold if they were lucky enough to supply a component to a COVID-related product. So, is the company worth ten times what it was before?

Of course, it isn’t. The uncertainty of future revenues would offset any rational increase in the valuation of this short-term cash flow boost. In the meantime, they should be satisfied with banking record income.

So, you’ve had great results for 2020 and 2021. Was it COVID? Was it in spite of COVID? Or was it just because your industry was on the sidelines of COVID, and you are seeing the long-term growth effects of running a good company??It’s hard to determine, much less to assign a numerical value.

Consideration of Follow-on Effects

What about other COVID-related impacts on businesses? Of course, hospitality and travel were affected directly. So were home improvement and home-brewing suppliers, although in the opposite direction. But how do you factor in the supply chain disasters that have followed?

If “You’re on mute” was the most used phrase in 2020, “supply chain issues” was to be the winner in 2021 - and 2022. How can you value an auto dealer who has no inventory, or a builder who can’t deliver a product because of lumber or labour shortages?

If you formerly shipped a container of goods from Asia for $2,500, then it cost $15,000, and are returning to some sort of normal, is that a blip? Will freight costs return to the old norm, a new but lower norm, or is this just a new reality? If you formerly paid $25.00 an hour for labour, and now you are paying $35.00, do you think pay rates are going to return to the old levels?

You may again be posting record years. How much of that is due to pricing, and how much is real growth. If prices drop next year, how will you account for a corresponding fall in revenues?

Approaches and Solutions

As a business broker, my job is to deliver an accurate estimate of value based on what similar companies are selling for. It’s not my role to guess what the value of your business might be if factors change again in the future.

On an individual basis, a number of advisors are throwing out 2020 or 2021 in those industries where regulatory shutdowns severely curtailed revenues. This approach may be valid if the business has since rebounded to previous levels. Alternatively, you can account for the anomaly year as a one-time gain or loss.

EBITDAC isn’t Going Away

In any (and every) case, the validity of any estimate of value is reflected in what a buyer will pay. The fact is, a continued influx of (still relatively) cheap financing, combined with increasing urgency among aging Boomers to leave their businesses, continues to fuel a strong acquisition market in some sectors.

The impact, both immediate and follow-on, of COVID-related factors isn’t going to magically evaporate. The effects of the virus may support some explanation, but businesses in decline will still sell for less, and those that are growing will realize more.

EBITDAC can be addressed in a number of ways, but it will be part of every valuation and business analysis for years to come.