So how will Covid-19 affect business valuations?! Well, it all depends….!
The current restrictions on trading for many businesses in both essential and non-essential areas of the marketplace could last for months, as also the after-effects with continuing restrictions until the end of this year and maybe into next year. The recession that will inevitably follow could last for some time, as happened after the 2008 market crash. This could have the effect of subduing stock market quoted Price to Earnings ratios, with FTSE Sector Indices P/E ratios similar to the period 2008 to 2012.
Businesses affected by a downturn in trade, will inevitably start to show a reduced level of trading on the Statutory Accounts, once these are filed at Companies House. Many companies may be in the throes of asking Companies House for the newly introduced three month extension to their filing deadline for their 2019 and 2019/2020 trading figures and the important results recording this year’s trading in the 2020/2021 period may not be available for inspection until towards the end of 2021 or early 2022.
Bearing in mind that most Valuers will require copies of the Statutory Accounts (full sets) covering the last three years as a starting point for a valuation, they will then have to take into account reduced profitability, losses and hits to the balance sheet. However, it would be reasonable to take on-board whether or not this was just a temporary or exceptional period and take into account or accrue for any “pent up” demand for products or services which will off-set any downturn. Likewise, any businesses that have benefited from the Covid-19 situation would need to be able to justify their forecast figures and market position.
Although Statutory Accounts are a starting point for business valuations, these are historical and therefore, management accounts will provide a more realistic idea of the current trading position, whilst an updated budget or forecast figure will become more essential to see how the business has fared during the lock-down period. Certainly, there will be more reliance than usual on management accounts and management financial forecasts, even more so if the Statutory Accounts are not up to date. Business valuations will almost certainly see a greater range in values if there is any uncertainty in the forecasts and to a degree, will offer more scope and flexibility for values, depending on the purpose of the valuation exercise and depending on who the client is!
For example, a business owner looking to sell, will want less emphasis on any temporary downturn in trade, with more focus on a positive forecast, whilst the buyer will use any down turn to justify a reduced value. A qualified business Valuer will undoubtedly have a bit more flexibility to hand, whilst still acting within the standards expected of their professional bodies.
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