ASSESSING BUSINESS IN A PANDEMIC SITUATION IS A PROFESSIONAL CHALLENGE
There are some key points that international experts focus on:
1. What assessment methods should we use?
The use of a market approach is not recommended because of the high volatility observed in the stock markets and the lack of transactions in the merger and acquisition market. The only applicable participant approach is the revenue approach.
- In applying the revenue approach, several scenarios need to be developed that are weighted.
- For the year 2020, it is recommended that the forecast be on a monthly basis, mainly because of government incentives available, such as interest-free loans, payday assistance, etc.
- Care should be taken when determining cash flows and discount rates that certain risks are not taken into account twice.
- When determining the discount rate, think more about what is reasonable than looking at numbers and counting. The discount rate should be higher than the pre-pandemic rate used. Report forward looking and implied data rather than historical data. It is recommended to use a normalized risk-free rate of return, because government securities yields are very low at the moment and may decrease further.
- Use more specific risk as an element of changing the discount rate.
- To think about whether there would be a change in the business model of the company in the medium and long term. Keep in mind that competition may be weaker after the crisis, as some companies will not be able to resume their operations.
3. What information is available at the date of the assessment?
Deduction of business value as of 31.12.2019:
- The impact of the pandemic and the subsequent effects on economies and individual sectors should not be taken into account in forecasting cash flows and discount rates, as this information is not available at the valuation date. If the assessment report is dated after the information is already available, it may be possible to include a text in the report that clearly states that this assessment does not address any effects arising from the pandemic. This text can be put as disclosure only, as limiting condition or as subsequent events.
Displaying business value by another 2020 date
- It is necessary to determine when the pandemic and the fact that subsequent changes in the economy and individual sectors will occur have become known. The date on which the stock markets start to fall sharply (02/20/2020 for the USA) or another date, for example for Bulgaria 13/03/2020 (declaration of a state of emergency) may be used. For some companies, the effect may have started to be felt earlier and this event had been known before. For example, for companies that rely solely on raw materials or goods from China. In the event of a state of emergency, a delivery problem may have started there and this date may be earlier.
3. Market or liquidation value?
It is advisable to derive market value, although some companies may not operate at the date of the valuation because of the extraordinary measures introduced, to analyze whether the rated company will be able to continue its business and if the analysis determines that it will it is impossible, only in this case, to deduce liquidation value. The presumption is that they will continue in business.
The information is based on an Extreme Uncertainty webinar: How Valuation Experts Should Respond to Today's Volatility and Risk - Business Valuation Resources