Covid 19 has changed the whole world and so many people have been affected by this pandemic. The entire world is still adjusting to the new normal. However you look at it, the world has changed with all the positive and negative effects of the pandemic. Not just people, the pandemic affected the bread and butter of every human being. Every business in the world was affected by the pandemic. Many people had significant business losses and some doubled their wealth during this pandemic.
The business value of your company might have also changed during this pandemic. New valuations of private and public companies are happening worldwide, with professional help.
What is a Business Appraisal?
Let’s start with this, so you might ask what a business appraisal right is. A business appraisal is a valuation of a business by an authorized person. But to come up with an accurate valuation, a business appraiser will thoroughly study the business and give a clear picture of what the company is worth.
There are many details to consider during business valuation to get a certified business appraisal. Other than analyzing the company details, such as financials and assets, the certified business appraiser decides which ‘valuation approach’ to use to check the company’s worth.
Typically, a business valuation of private companies happens when an owner wants to sell his business or merge with another company. Other reasons are obtaining loans to raise capital via equity or debentures to expand the business, adding or buying our shareholders, or business or personal litigation.
What are the Impacts on your Business Valuation Due to Covid?
Traditional ways to value your business are not going to work anymore due to the global change that has happened since Covid came into the picture. While there is no guide on starting afresh or following some new procedures to evaluate your business, these are some points for your business valuation professional to note before going forward and doing their work. These are some of the issues to register for an appraiser to come to a realistic estimate value of the company:
Subject Company Risk Assessment
The appointed business valuation professional must estimate your business value by executing a thorough risk assessment. The pandemic has changed the risk profiles of many companies. Sectors such as retail and hospitality have had their business affected very negatively, whereas industries such as the medical and construction business have made a fortune during the pandemic.
So, starting with a risk profile of your business will be vital. Factors that affect the subject company for a risk assessment for business valuation include personal charges, management depth limit, or changes in the consumer base.
Capitalization/ Discount Rate
The risk profile for your company will be incorporated into the capitalization rate or discount rate estimation if an income approach analysis is performed.
So, what is the capitalization rate? Well, it’s an estimation of the rate of return that a hypothetical investor would require if they were to invest in your company. This rate is the critical driver in the development of your business.
The valuation of private companies is something every business owner should do. The valuation professional will consider the need for adjustments to income or expense items that may be non-operating or non-recurring when reviewing the historical or projected financial information of your business. These adjustments are referred to as normalization adjustments.
The adverse effects of the pandemic have resulted in company owners realizing the income that may be non-recurring along with one-time expenses. So, these should be analyzed thoroughly. Those items which are non-recurring and non-operating should be eliminated from the valuation analysis to provide an estimate of your business’s future.
Weighing of Periods
The valuation professional utilizing either the past or the future income streams of your business must consider the need to weigh the financial results of 2020.
When using financial projections for a discounted cash flow analysis, your valuation professional must carefully review the projections and communicate with the management to ensure the assumptions used in the projections reflect the anticipated results of your business in the current economic conditions.
This might help you to check the changes your business has gone through since Covid started; you must have a professional review of your business value in these economic conditions.