Valuing Your Business in the Wake of Covid-19

The Corona Virus Has Affected South Florida Business Sales

The Covid-19 global pandemic has caused unprecedented business interruptions and business shutdowns for many Americans. Here in South Florida, some businesses have been spared the carnage but most have not. For those business owners fortunate enough to be in industries unaffected or even helped by the virus such as some healthcare-related businesses, the virus has not affected the value of their businesses. It may even have helped the valuation. But the majority of business owners are facing very serious questions about the current valuation of their business.

How the Corona Virus Affects Business Valuation 

The most critical part of a business when assessing its valuation is how much profit to the owner (or ‘owner benefit‘) the business generates. Normally, a buyer will look at the financial history of the business when making this determination. Because of the Virus, some businesses should be valued based on their ‘run rate’. The ‘run rate’ of a business refers to what the sales and profits of the business are today, or for the current quarter (or even the current month), and annualizing it over the course of a year.  This will invariable be a far higher annualized number because it is not including the previous ‘down time’ when the business was partially or fully closed due to the virus.

Current Run-Rate

The current run rate gives the buyer more of an up to date picture on what the business is actually generating in sales or profits. Hopefully, the current ‘run rate’ exceeds the historical sales and profits, thus painting a more positive view of the business from the buyer’s perspective. After all, an intelligent buyer will look at what sales and profits the business will generate in the future, not in the past.

Sales Have Not Recovered to Pre-Virus Levels: Still Sell Your Business?

  • Current ‘run rate’ of the business may show dramatically less sales and profits than historical financials show from 2019.
  • Restaurants, bars, and retail stores (selling non-essential items) may have a  ‘run rate’ with far less sales and profits than from before the virus.
  • In order to receive top dollar for their business and have sufficient leverage during negotiations, sellers in such a predicament may simply wait out the virus until sales and profits return to pre-virus levels. This may take time and be a very long slog.
  • Hopefully such sellers have received government assistance and will be able to retain their employees so that they can quickly gear up to pre-virus sales levels.
  • Sellers with dramatically lower sales and profits may choose to simply sell their business as an ‘asset sale.’
  • An asset sale does not measure or factor in the business’s profits in the valuation.
  • The asset sale approach only looks at the physical assets (such as equipment, inventory, or build-out value) or intangible assets (such as franchise rights, patents, liquor licenses, etc) in the valuation.
  • This approach does not yield the same purchase price of a regular income-derived valuation approach.
  • But many successful sales of businesses are asset sales.

Some Industries Benefited from the Virus

On the bright side, many service-related companies related to home maintenance or home repair has seen an upsurge in business. This is because many people have spent so much time at home in the last few months and wish to revitalize their ‘safe zone’ at home. Some companies in the home healthcare industry have also seen an upsurge in business because their patients do not wish to go to hospitals and prefer receiving their care at home.

Buyers Will Want to See Updated Financials

In the case of such companies that have benefitted from the virus, buyers will want evidence that the increased business is sustainable even after the virus passes or there is a vaccine. If so, then the buyers will look at the increased ‘run rate’ of the business and be willing to pay more for the business.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your business.