How Will the Coronavirus Pandemic Affect the Value of My Business?

Many business owners are concerned about the long-term effect that the Coronavirus pandemic will have on the value of their business. And rightfully so, since we have never before in our lifetimes faced such an economic anomaly.

The short answer is: It depends on the long-term effect that this period of quarantine has on your business.

To be more specific to your situation, let’s first remind ourselves of a couple valuation principles.

Risk v. Reward

First, the value of a business is based on:

• the anticipated future monetary benefits of owning the specific business, and
• the risks to those monetary benefits.

So, even if you’ve been in business successfully for several decades, if a new technology is emerging that will make your business obsolete (think Blockbuster versus digital streaming), your business will not be worth much—and possibly nothing beyond the net asset value.

On the other hand, if you have a business that is only breaking even right now but is on the verge of a new technology or innovation that will catapult the business to greater success (think Netflix back in the days of their transition from mail-order DVDs to streaming), then the value of the current business may be substantial, even in light of its past history.

Discounting Atypical Events

Second, we should remind ourselves that adjustments are made for “one-time” extraordinary occurrences. A typical example of this might be higher than typical earnings for a hotel due to the Super Bowl being hosted in your city. The Super Bowl may never come back to your city or may be years away so a buyer may consider that a “one-time” event and adjust the hotel earnings to remove the effects of it.

Business Value in the Time of Corona(virus)

Let’s now apply these principles to businesses based on the impact of the pandemic: Those that have been negatively impacted and those that have benefited during this period.

A business that has been negatively impacted by the pandemic, such as a restaurant, will be evaluated on its anticipated outcome from this crisis. If after the pandemic, the restaurant opens up, the customer base returns, and the business performs in the months after the same way it performed prior to the crisis, there would be no anticipated change to the value of the restaurant. The historical performance of the business would be adjusted for the “one time” extraordinary event of the pandemic. For the next 5 years, prospective buyers seeing the dip in sales in the 2020 numbers will immediately say, “That must have been due to the Coronavirus.”

On the other hand, if a negatively impacted business had its revenue decline after the pandemic, then the value of that business will likely be less. For instance, articles have been written commenting that since everyone is learning to use “Zoom” for videoconferencing, businesses may find this a less expensive alternative to business travel and the airline industry could see a loss of travelers. Though time will tell whether this is true or not, if this ends up being the case, the value of airlines (and other travel-related businesses) could decline significantly post-pandemic as a result.

This same principle also applies to businesses that have benefited from the pandemic. For instance, grocery stores and mask manufacturers, whose revenues have increased substantially during the crisis, will likely have this period of time adjusted out of the calculation of the future anticipated benefit stream for their business. There would be no reason to “rush to sell” the business based on 2020 performance since savvy buyers will recognize the increase as a one time effect of the pandemic.

Should Another Pandemic Be Factored into the Valuation Equation as a Significant Risk?

Pandemics definitely qualify as a business risk, but it is unlikely that they will be factored in from a monetary standpoint due to the infrequency of them. If anything, buyers will consider the performance of a business during a pandemic as a risk, but as an unlikely risk—along the lines of the risk that a tornado may come through and destroy their business or a 100-year flood will destroy all of their assets.

It is also quite possible that insurance might become available after this crisis passes to insure against the risk of future pandemics. Again, time will tell.

Will the Value of My Business Be Affected By Crisis Loan Programs?

If you are considering an asset sale, then the going concern value of your business will not be affected by any loans you acquire during the pandemic. Earnings calculations of your business would be adjusted for the effect of business financing and the liability for those loans will remain with the seller (typically to be paid at the closing from the proceeds).

On the other hand, if you are considering a stock sale, then any loans acquired now will definitely affect the value of your equity in the business. The value of the equity of your business (your ownership interest) is based on the going concern value, the excess assets and the liabilities. Since the buyer of the equity would effectively “assume” those loans, the balance would be deducted from the going concern value. This means that the more loans and liabilities your business has outstanding, the lower your equity value.

What If We Plunge into a Recession?

If this crisis plunges us into a deep recession whereby all businesses slow down, the overall value of a specific business will likely decline relative to the slowdown they experience. However, multiples will likely not change, so the value of a business will be directly impacted by their individual slowdown and future anticipated recovery.

Other issues with a recession are that there are typically less buyers in the market and less institutional financing sources so the business sale process takes more time to complete and sellers will often hold a note from the buyer.

What Can I Do Now to Protect the Value of My Business?

The answer to this question is really specific to your type of business. However, the following are things every business owner should be engaged in right now:

• Reduce expenses wherever possible. This is not the time to be sentimental. Make sure every expense is justified as necessary to maintain maximum revenue.
• Educate yourself on the loans the government is making available. These loans will be a lifeboat for some businesses but could end up being the kiss of death to others.
• Seek advice from your professional advisors. You don’t have to go it alone. Get input from your attorney, accountant, financial advisor, insurance agent, and others who can help you navigate this situation.
• Be proactive. Many will sit on their hands to “see how this turns out.” Be innovative and look for the opportunities. This might involve a sensitivity analysis to look at the best case, middle, and worst-case scenarios of the future and your best response to each.
• Don’t react too quickly. Some are tempted to just throw in the towel. It may be that time for your business, but don’t do that without a lot of advice from professional advisors. How you leave your business affects employees, landlords, and customers and can also leave you with a host of long term legal problems if not done correctly.

A Hopeful Tomorrow

And finally, be thankful for the good things in life. I have a picture on the wall of my office with a quote from B. C. Forbes that says:

“Forever remember that the business of life is not merely about business, but about life.”

If you have any questions about your specific situation, please call us for advice on any issue involving business valuation or business transactions.