Business Valuation in the age of COVID-19

Raghunath. T, Director


It is said that valuing businesses is both a science and an art.

A perfect amalgamation of both, business valuation, relies on scientific evidence & methods and qualitative artful considerations. But why do we need to value our business? Is the purpose of business valuation a simple profit and loss snapshot? Not really; business valuation can be seen as more of a health check that gives us an insight into the strengths and weaknesses of a business and what we are worth; and not what we want.

More so with all the events caused by COVID19, company valuations are becoming a critical area of consideration. Valuations may be conducted for a variety of reasons, such as Selling or buying the company, Partnership dissolution, Legal disputes, or Succession planning

In any of these cases, the owner should have a thorough understanding of cash flow, growth, margins, assets, liabilities, and intellectual property.

Fundamentally, the major factors that help in determining the value of your business are;

  • Historical financial performance

The financial performance of your company in recent years that includes profit and loss statements, balance sheets, and tax returns is a significant parameter that investors consider in a business valuation.  Trends in revenue and expenses are a basis on which investors assess potential and hence value the company.  There are, of course, companies – usually in the “new” businesses like technology and high growth sectors that do need to be valued without a historical track record, and that is where the next factor plays a role i.e., –  the future growth potential

  • Future growth potential

While present and past statistics are important in determining value, equally important is the future growth potential of your company. Investors need to know the expected growth of the business and the chances of expanding the business’ product/ service line in the future. Here, the assumptions behind the numbers that generate enterprise value play a very critical role. The valuer will have to get even deeper into the business, understand the industry, its risks, and value drivers even more closely to arrive at a meaningful result.

  • People

An organization’s success or failure is determined by the people that run it. A company cannot be valued without considering the roles and impacts that its key people make. Unfortunately, this is a silent and understated factor in most valuations, but it is possibly one of the most critical ones.

There are of course, several other factors such as:

  • Customer base: A diversified customer base v/s reliance on a few clients
  • Risks Factors: Country, Industry, Markets of operation
  • Capital Structure: Debt v/s Equity

As mentioned earlier, business valuations have always been challenging and tricky and now the current pandemic crisis has added a layer of uncertainty to the whole process. While calculating the true value of a company, investors make assessments on future economic benefits based on past performances and supported projections. But, in the current scenario, it is hard to make assumptions and arrive at a fair value. A range of valuations or valuation reports that cover assumptions made in COVID-19 and non-COVID-19 scenarios will have to be provided. It is in conjunction with this that valuation methodologies, such as discounted cash flow valuations or valuations based on earnings or asset bases can be used.

While certain businesses and sectors are experiencing significant declines in market capitalization, there are others that are not just surviving, but thriving. Tourism, Hospitality, and traditional offline retail are some of the most negatively affected markets that are struggling to adapt. There has been a dramatic shift in the shopping pattern of customers. In the pre-Covid days, customers were happy to spent hours checking retail stores; but now they find shopping via e-commerce sites more convenient and safe. Many such stores were forced to shut down temporarily or sell their business.

Companies that were facing fundamental problems prior to the pandemic will have a tough time to cope with the situation, whereas companies that had proper business continuity and crisis plans will be in a position to take advantage of the new scenario.

Many buyers are ready to buy businesses that have been temporarily shuttered due to the pandemic, provided it has the potential. On the seller’s side, it is better to sell their business at its current valuation, rather than draining off their personal assets in an attempt to save their company. However, it is mandatory to figure out a deal that works for both parties.

A good business valuation team will assist in coming up with flexible deal structures with a reasonable and satisfactory price for the seller and the buyer. HLB HAMT, as a business valuation company has a team that helps companies and investors in Dubai, Abu Dhabi, and other emirates in the UAE in determining the enterprise value and supporting them through the transaction.  If you are the owner of a company in the UAE and would like to do a valuation on it or if you are looking to invest in attractive businesses in the UAE but need to do a valuation of your target company, our team will guide you. The team lays emphasis on understanding the business model and works together with the client management team to validate their strategic business plans as well as the key assumptions and risks involved. This will ensure that the valuation which is arrived is realistic and acceptable to any interested third party.

HLB HAMT covers sectors that include retail, financial services, technology, real estate, hospitality, manufacturing, healthcare, food & beverage, automotive, and many more.

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