We are getting a lot of questions from business owners who wonder what impact the Pandemic is having on the value of their businesses. While it is impossible to give a blanket answer, we would like to share some 30,000-foot dynamics that likely apply to most businesses.
First, we believe that private business valuations are somewhat more stable over time than that of their public company counterparts. This is because public company investments are much more liquid and are owned disproportionately by shorter-term investors.
Second, the COVID 19 epidemic is what we call an unexpected externality. The economy was in pretty good shape before it erupted, and, eventually (!), the business climate will return to some degree of normality. We advise clients to document (best they can) the impact of the disease on their near term business results…so, it will be easy to look back and estimate what 2020 results would have been without that impact.
Third, we must consider the mindset and financial wherewithal of potential buyers. It’s fair to assume that most businesses and investors have been at least somewhat impacted. Which means they’re not able (or willing) to pay what they could have pre-pandemic. And, now the world will be nervous for the foreseeable future for future virus disruptions, whether it’s the Corona Virus Part Deux or some new pathogen. If this happens, it could keep a lid on valuations for some time.
Conversely, the companies that have escaped a meaningful impact from the Pandemic could get a structural boost in their valuations by being a new “safe harbor.”
Lastly, this epidemic has been such a world-shaking event that business owners should realize that, when it comes to planning/contemplating their futures, they can’t afford to be apathetic or inert. Because, as we’ve witnessed, anything can happen and that’s a scary thought for a business owner who has 90% of his/her wealth tied up in an illiquid business.
And, if we’re right about that, there will be an acceleration in businesses being put up for sale in the next few years. It will be a buyers’ market. This can exert some downward pressure on selling multiples, and make deliberate “exit planning” more critical.