On Tuesday, May 5, 2020, I was the moderator of a virtual Town Hall meeting on the topic of: Impact of COVID-19 on Business Valuation. This Town Hall was organized by myself as the State Chapter President of The National Association of Certified Valuators and Analysts (NACVA) in Maryland and Washington DC in partnership with NACVA's Headquarters in Salt Lake City, Utah.

Here is the video of the Virtual Town Hall.


Moderator: Achille Ekeu, MBA, CVA, President & CEO, The Washington Valuation Group


Here are the Panelists:











Click below to watch the entire Town Hall Meeting.



The coronavirus pandemic is wreaking havoc on the global economy as we’ve seen last week with the stock market crash that compares to what we saw in 2008 during the financial crisis. Many businesses, big and small have lost an incredible amount of money last week alone. And may still lose more the coming weeks if the spread of the virus is not contained quickly.

According to the New York Times:


Goldman Sachs economists expect global growth to slump to around 2 percent for the full year, down from their previous 3 percent forecast, but said in a note Friday that there are risks of a worldwide recession if the virus becomes a more severe global pandemic.”


So what will be the impact of this virus on the valuation of small businesses?


To answer this question we need to understand that valuation is based on three main factors: cash flow, growth, and risks. Assuming that growth is stable, the Gordon Growth Model calculates value as: Present Value = Cash Flow x (1+growth)/ (Discount Rate - growth).


So let’s analyze the impact of this coronavirus on small businesses through these three value drivers.


Impact Of The Corona Virus On Cash Flow

The cash flow of a company depends on its net income or profit. The net income depends on revenues generated by the company minus its expenses. When the revenues are reduced due to clients’ fear of virus contamination, the impact is immediate on your profit or net income. You will see a reduction in your profit, which in turn will reduce your cash flow. This cash flow reduction will adversely affect the value of your company.


Impact of the Corona Virus on company’s Projected Growth

The valuation of a company takes into account the projected growth of the company for the foreseeable future. This is important for investors as they seek to understand the long-term viability of the company they are looking to invest their money into. When a pandemic like the coronavirus is taken into account, it's hard not to lower the industry and the national economic perspectives on growth in the short-term (less than a year), medium-term (1 to 3 years) and long-term (4 to 5+ years). Therefore, the revised industry and national economic growth projections will have an immediate negative impact on any company’s growth forecast.

Because of that lower growth forecast, the company becomes less attractive to investors as the uncertainties mount over time. This has an impact on the value of the company.


Impact Of The Corona Virus On The Risks Of The Company

There are environmental or external risks as well as operational or internal risks in any company. They constitute together all the risks associated with doing business. The environmental or external risks are all these risks a company cannot control but that has an impact on the well-being of a company. They are mostly risks associated with the type of industry as well as the national, regional, or local economy.


When the economy is not doing well due to the impact of the coronavirus or when the industry in which the company operates is considered a high-risk industry, that has an impact on the value of the company as it is considered high risk for investors. The same is true when operational or internal risks are deemed high by investors due for example to the fact that a company has very few clients (no diversification), one key person running the company (no cross-trained employees), poor customers and/or employees satisfaction, low-profit margins, etc.


Conclusion

The valuation of small businesses will be lower to significantly lower if the virus continues to grow as projected by World Health Organization experts. It is hard to predict the real impact of the coronavirus on the national, regional or local economy at this point, but we are certain that if the disease continues to expand, that could install fear in communities, customers, employees and other stakeholders involved in a company’s well being.

The impact on small businesses could be catastrophic in the medium or long term. We see this happening in China already where businesses only have 2 months' worth of cash reserves to use in case of emergencies. After that, they will start closing doors and laying off employees. At that point, the company has no value what so ever.



Achille Ekeu

  • Achille Ekeu, MBA, CVA

Happy New Year! Here we are in 2020 and life is still going great for some, not so great for others, and yet we are here trying as hard as we can to make sense of the life God gave us.

If you are a small business owner, whether you are just starting or have been around for a while, you know the best way to make sense of your hard work and dedication to your business is to prepare it for a transition to a new owner. However, if you have not been preparing for it, in 2020 it will be a great opportunity for you to stop and think about it. In addition, we have some data that were very recently published that will help you make that decision comfortably.


Recent survey results of over two hundred small business owners published by The Wilmington Trust, uncovered important reasons why small business owners must have a viable transition plan. This survey shows small business owners where they stand with their peers.


Key Survey Takeaways


The four key takeaways from this survey are that:

  1. 58% of business owners have no specific plan despite the fact that long term transition planning usually results in higher business values, lower taxes, and more peace of mind for all stakeholders.

  2. 47% of business owners over the age of 65 do not have a specific transition plan, even though starting the transition planning process early in the life of the business has been shown to lead to better outcomes.

  3. 78% of business owners who do not have a plan say the main reason is that they enjoy running their company. But they may not realize that with proper planning they can continue to run their business, yet also maximize value and reduce taxation.

  4. 67% of business owners believe that they have a very good idea of their company's worth, but two-thirds of them also want to talk to an expert about valuation. This highlights the need for outside specialists like the Washington Valuation Group (WVG) who can accurately measure and help improve a company's worth.

Business Owners 5 Transition Goals


According to the survey, most small business owners' goals are to:

  • Ensure the company remains viable in the long run.

  • Take care of their employees.

  • Ensure customers are taken care of.

  • Financial security for self and family

  • Ensure the company retains values.

Business owners often rely on their tax professionals, lawyers, and accountants as the three most important advisors. They may be underestimating the importance of other experts.


Business Valuation Experts


Regardless of what goals a business owner has, the bottom line is that the worth of the company is what matters. Therefore, a business valuation is absolutely critical to making sure the owner does not leave any money on the table. A plan to maximize value must be in place hence the need for a business valuation expert.


According to the survey, 67% of business owners say they have a very good sense of their company's worth yet the same percentage wants to speak to a business valuation expert. Among those who claim to have a very good sense of their company's worth, 65% are still interested in confirming it.


Here at the Washington Valuation Group, maximizing the value of your company is our concern and we've helped many business owners determine and improve the value of their companies so they don't leave any money on the table when the moment comes.

Listen to some of them here.




Achille Ekeu is the President and CEO of The Washinton Valuation Group (WVG). He is a Certified Valuation Analyst (CVA) and board member the National Association of Certified Valuators and Analysts (NACVA). He is an Author, Speaker, and Consultant on business valuation issues across the US and beyond.