Coronavirus And Economic Uncertainty Impacts Business Valuation

There is always a reasonable amount of economic uncertainty, however the Coronavirus pandemic and resulting recession on the way makes our current situation unprecedented. There will be concerns regarding the value of your business and your equipment, whether you are a retailer, restaurant, hotelier or healthcare practitioner, in construction or crops.

There are post-Coronavirus risks and many other uncertainties that will impact business valuations. Among them are:

• Short-term economic disruption of both the domestic and global economy,
• Measures currently undertaken by governments and banks that will cushion but not eliminate some of the negative economic impact,
• Uncertainty as to what sort of recovery is likely to take place,
• Businesses and individuals may be cautious and change habits in the long term if there is not a vaccine, What long term opportunities, innovation, investment, and technology will emerge post-pandemic, and
• Which companies will flourish and which will not.

There will be a need to account for subsequent events that occurred after a valuation date.

Put simply: if underlying assumptions and methodologies used to determine the value of a business change significantly, then a valuation from a prior date may no longer be suitable for a current use. Coronavirus would materially impact the determination of current fair market value, which suggests that any prior valuation needs to be updated.

For example, when the valuation date is in the past, but subsequent events have occurred prior to the report date, a disclosure may be in order for those BV engagements. There is market confusion, uncertainty as to what the business recovery will look like, financial reporting issues to consider, where the business is located and where that location is in the Covid-19 cycle. While a subsequent event does not necessarily change the value as of a valuation date, it may infer that the value as of a later valuation date may also be relevant in cases or situations where the event is of great significance like Coronavirus.

Business valuations prepared for tax and litigation purposes generally use “fair market value”, which the IRS Revenue Ruling defines as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” Cases before the tax court have noted subsequent events that occur within a reasonable time after the valuation date may be appropriate to consider. Therefore, the valuation date required to achieve the objective of the valuation like equitable distribution, taxation, pre-damage event value, or minority owner oppression, may be more important than the COVID-19 after-effects.

The Coronavirus and the events unleashed by the outbreak were unforeseeable business valuation experts preparing reports at the end of 2019. It is more important than ever when valuing a business post Coronavirus to consider and apply multiple methods, approaches, and forecasted cash flows in order to arrive at logical and fact-based conclusions. It is imperative to analyze and evaluate the new strengths and weaknesses of the business, in addition to possible risk factors like:

• Ability to obtain financing
• Stability of supply chain
• Level of sustainable earnings
• New competition
• Lack of available labor
• Drastically changed business model
• Erosion of customer base
• Length of time to recover to pre-virus levels
• Funds needed to reopen, retool, restaff
• Impact of new COVID-19 legislation
 
Contact Us: Whether valuation is needed for the purposes of litigation, tax, mergers and acquisitions, venture capital/private equity markets, and financial reporting or estate planning, opportunities exist. In some cases it behooves the business or individual client to take advantage of lower valuations, as well as cases where a revisit might produce a higher value attractive to purchasers, lenders, etc.