The global pandemic has changed life as we know it. At this point, it is not clear how devastating impact it has had by putting a hold on countless business opportunities. However, many people are facing financial and emotional hardships. Thankfully, it looks like more and more places are opening up again at limited capacities, but that may differ depending on your location. Still, lots of workers are being laid off, the new health protocols are challenging to adhere to, and adjusting back to social life after prolonged isolation is a whole other thing in itself. Business owners have it especially tough due to the multitude of challenging decisions they are faced with to stay afloat. Even if one keeps a business idea alive, the question of how a company will be affected in the future can be intimidating. Here are some tips on how you can value your business in 2021.
Practical Business Knowledge to Apply During the Pandemic
Valuation Basics
Firstly, it is handy to understand the basic criteria of business valuation. The business world evaluates companies by three main approaches. Namely, these are the market, income, and asset approach.
The Market Approach
In this approach, a company gets compared to other similar “guideline companies” that got sold in the past. The common metrics that get weighed are amortization (“EBITDA”), depreciation, earnings collected before interest, and tax. The difficulty is that in today’s economic climate, the data of guideline companies can not be relied upon exclusively. We are faced with new circumstances, making the risks for investors much greater than usual.
The Income Approach
When using the income approach, the evaluation of a company is calculated according to the potential future benefits that an investor might gain by owning a given asset. It is calculated by the estimated cash flow, as well as the date of the ROI.
The Asset Approach
The third method is usually applied to calculate value when the liquidation worth of a company is more than its operating value determined by the previous two approaches. In short, this means that it applies if a business would gain a better ROI by closing and paying off all expenses, instead of staying in operation.
Post-Pandemic Economic Recovery
“U” Form Recovery
Depending on how the business landscape will look post-pandemic, we could see a “U” turn-shaped scenario. That would involve a re-opening of the economy, where unemployment would, for a while, stay higher than usual as people look for new vocations.
“W” Form Recovery
In the second scenario, we could face a “W” shaped recovery. It would involve a re-opening of the economy where people would have the opportunity to return to their jobs, but the virus would resurge in waves. People could get ordered to stay at home, and that would continue back-and-forth as the pandemic dissipates slowly.
It does look like we will face more fluctuations until things get back to normal. However, it is not known what the new “normal” will even look like in the post-pandemic. That means businesses should estimate lower earnings for at least several quarters, depending on whether your business relies on face-to-face contact.
Assessing the Impact on Value
The valuation of a business heavily relies on its future profitability to investors. As it is still unclear what the future will hold, each business will likely be affected differently. Here are some basic questions you should entertain to understand your particular economic position:
- How significantly did the pandemic impact my profits?
- Does it seem like the impact will be short-lived or permanent?
- How much time will my business need to recover?
- Will my particular sector return to pre-pandemic functionality, or will new rules impact its operations?
- What is the impact of the pandemic on my usual customer base?
- What changes can be expected in my business environment, and will the level of competition be affected?
- What strategic moves would improve my position to keep my business thriving post-pandemic?
These questions should give you a rough outline of how to value your business during the pandemic. There is no clear-cut approach that will work for all sectors. Each industry is affected by restrictions to a different degree. What is sure is that you should keep a keen eye on the main business news outlets regarding any upcoming government decisions.
Conclusion
Even after the repeated boom and bust cycles of Wall Street, it is still possible to make real money in the stock market – as long as investors have a disciplined approach. We recommend that you consider options to mitigate your risks. In case you are in a challenging situation, you could consider gifting a part of your business or trying to push forward the date of your tax filing. That will work towards bringing down your tax liability, which may be greater due to a currently low business valuation. As the world returns to normal and your sales start increasing, the valuation will go back up. Until then, it is recommended to postpone any financial fillings, if possible. We would love to know how your business is surviving during these times. Are things getting back to normal in your sector? Please share your comments in the section below!
Author’s bio:
Scott Carrion is a freelance writer and analyst focusing on business and marketing. His Master’s degree in Business research from Curtis L. Carlson School of Management has given him a broad base from which to approach many topics. He works closely with B2B and B2C companies providing useful and engaging content that can convert viewers into customers.
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