Company Valuations during a pandemic

Valuations are generally performed on a ‘market’ value basis, which is the price the shareholding might reasonably be expected to fetch, in money or money’s worth, in a sale between a willing buyer and a willing seller, each of whom is deemed to be acting for self-interest and gain and both of whom are equally well informed about the Company and the markets within which it operates.

The FTSE100 stock index opened the year at 7,542 but suffered its second worst single day decline on record in March, falling briefly to below 5,000 points. It has since partially recovered on the back of stimulus packages and support from the government, alongside some positive sentiment from large business speculative about a recovery. This volatility and overall decline in the stock markets cannot be ignored and should be considered when performing valuations of private companies, particularly under a market value approach.

Private trading companies are often valued on an earnings basis where a multiple is applied to the level of future maintainable earnings (‘EBITDA’ being earnings before interest, tax, depreciation and amortisation, is a commonly used metric of this). The assumption is that the cashflows accruing to the shareholders equate to the maintainable earnings. The impact of COVID-19 will need to be considered in determining the level of underlying maintainable earnings, with a valuer looking at both historical earnings and forecast results in making this assessment. Historical results may no longer represent maintainable earnings, and forecast results may have increased uncertainty and require adjustment and monitoring in light of recent events. As the market recovery continues it will be crucial for a valuer to assess the forecast results against current management accounts to support the reliability of the forecast data.

Valuation multiples should be linked to market data and therefore fluctuations and volatility in stock markets, as discussed above, must also be reflected in private company valuations. We would expect to see a discount applied to current valuation multiples for most industries. Ultimately increased uncertainty brings increased risk for shareholders which can reduce company values.

While earnings based valuations reflect expected trading profits, asset based valuations provide a useful benchmark and are sometimes the primary basis of valuation if a business is loss making. However, an entity’s reported net asset position may not be reflective of the fair values of the respective assets and liabilities. In times of recession, asset values are often suppressed or assets become irrecoverable, requiring impairments to be made. It is imperative that a valuer recognises such adjustments in restating the balance sheet to its fair value. External experts may be required where the valuations of such assets has a material impact on the overall valuation.

Our specialist corporate finance team regularly advises on business valuations ranging from small owner managed companies to large international groups. We can value the entity as a whole, individual shareholdings, or an operating division of a business as required.