This is a summary of a Mid Market Growth article. Read the full version here.
Calculating the price of a company is essential information for [buyers/investors], but how that’s done is changing amid the COVID-19 pandemic.
The assets [buyers] consider when assessing a company’s value —like real estate and equipment—have taken a beating since the start of the pandemic, according to Jim Volkman, managing director of Financial Valuation Services, a business appraisal firm.
“Most of my clients say with pretty good certainty they’ll lose money over the next 12-18 months, but they’re much less certain about when they’ll return to profitability—and when they’ll return to pre-pandemic profitability,” he said.
Historically, appraisers used the past performance of a proxy company as a reference point, but the pandemic has upended easy-to-find historical comparisons. That’s leading some appraisers to add an additional risk premium to the weighted average cost of capital—calling it the “COVID-19 alpha”—to get a clearer picture of company value.
The presidential election outcome, future tax policy and the phase-four stimulus package are some of the things appraisers will build into their projections.
Now that they can’t meet in person, deal-makers also face challenges in completing essential [due diligence] functions, including business development and due diligence—and Zoom may not be enough to bridge the gap.
“Those are companies where it might be easier to get a deal done than trying to start a new relationship from scratch,” she said.
Don McDonough, managing director at private equity firm JLL, says prices have remained stable.
Despite rising complexities in the deal process, McDonough said he’s seen little movement in valuations... In the wake of the pandemic, they are extending exit processes and increasing holding periods. He added that companies going to market today are in industries that have performed well during the pandemic, like health care.
“Strong businesses are still commanding strong valuations,” he said.