Impacts from COVID-19 on Private Company Valuation
April 30, 2020 | Michelle Temeyer
With the recent volatility in the stock market, many are wondering the impact on private company valuation. Although public markets are reviewed and may affect private company valuation, most mid-market companies do not necessarily mirror the recent extreme market fluctuations. The public market volatility is an indication of increased uncertainty; however, macro events must be considered in context of each company’s value indicators. The impact can differ within specific geographic regions, industries, etc.
Valuation is performed as of a specific date and considers what is known or knowable as of that valuation date. The valuation community has stated that the impacts of the pandemic were not known or knowable as of December 31, 2019. After this date, more information has been and will continue to be known or knowable, and thus should be considered in the valuation. The exact timing of when the pandemic was known or knowable is subjective and may be impacted by geographic locations and industries. COVID-19 is currently impacting businesses across industries, and the impact on each specific business should be evaluated.
Forecasts should be updated to consider the extent of the pandemic. Consideration should be made to assess the short, medium and long-term impacts on the company’s cash flow. The impact on a specific company could be positive or negative, and when appropriate, multiple scenarios could be analyzed. Revenues could be impacted due to project delays or cancellations, government shut-downs, changes in product mix, changes in customer demand, etc. Expenses should be analyzed for significant changes due to supply chain disruption, changes in workforce, change in productivity, decreased travel and conference expenses, growth, etc. In addition, payments received from government loans should be considered.
As many companies were valued as of December 31, 2019, some are considering updating the value as of a new valuation date to encompass these recent events. Overall, an interim valuation decision should be evaluated in the context of fairness to all participants, particularly in ESOP companies. In addition, an interim valuation could be considered if the value is used in other contexts or purposes, such as synthetic equity. Some considerations for an interim valuation include significant changes in:
- General market pricing
- Industry conditions
- Available capital (cash, debt capacity)
- Capital structure
- Long-term outlook
- Labor force (labor interruptions or layoffs)
- Government interventions
Some business owners may consider succession planning opportunities by gifting ownership interests due to potentially lower valuations. Ultimately, each company’s situation is unique and should be evaluated individually.