Long COVID – A Different Definition for Business Valuations by Dylan Stone
Posted on August 16, 2023
by
Dylan Stone
While it has been three years since the onset of the COVID-19 pandemic, its impact on business valuations and lost profit damages are still being felt today. In fact, many of the challenges from 2020 through 2022 are being litigated in the courts right now.
Lingering geopolitical concerns and economic uncertainty have made it increasingly difficult for closely held businesses to evaluate risk and future benefits, which are critical to business valuation. Without having a crystal ball to predict when the economy will be on more stable ground, risk will remain elevated, thereby reducing business valuations in most cases. However, by identifying and addressing current risk drivers influencing valuations, businesses may have an opportunity.
For example, business valuators often look at a business’s historical earnings to understand its potential value in the future. Using this income approach, as risks increase, investors will generally demand a higher rate of return, which is represented by a discount or capitalization rate on future earnings. Increased risks create greater uncertainty and corresponding higher discount rates, which ultimately may lead to lower valuations. This inverse relationship also exists when projections are expected to remain stable.
It is important to point out that there are times when business value can actually increase during times of uncertainty. This was the case for companies such as Zoom, Peleton and a variety of e-commerce companies that met unfulfilled needs during the pandemic. Consequently, it is important to recognize that there is no “one size fits all” approach to addressing COVID’s impact on a particular business’s value. Rather, valuation experts must understand the subject business and the industry in which it operates to assess more accurately COVID’s impact on all the factors that contribute to a company’s value, including its operations, revenues and profitability.
Evaluating the risks and benefits of a business and the related impacts of COVID and resulting economic uncertainty often requires a business valuation conducted by an experienced valuation professional. No matter the circumstances, a regular and timely valuation may also help a business predict its future benefit stream, an investor’s required rate of return, or the ultimate value of its acquisition.
About the Author: Dylan Stone is a senior manager with the Forensic and Advisory Services practice of Berkowitz Pollack Brant. A member of the Association of Certified Fraud Examiners, the American Institute of Certified Public Accountants and the National Association of Certified Valuators and Analysts, he can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or dstone@bpbcpa.com.
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