Company valuations during the pandemic

by Ben Croston

Back when the first lockdown was introduced on the 23rd March 2020, I don’t think many expected a third national lockdown would follow within the space of nine months. It’s fair to say that the pandemic has been a rollercoaster ride for companies, with the effect on different sectors of the economy poles apart. Whilst many in the software, medical and technology sectors have seen an increase in demand for their products, sectors such as retail, leisure and hospitality have been forcibly closed for large parts of the year.

These regulatory decisions, and the mitigating actions companies have taken to tackle the pandemic, have impacted on company values. The three key aspects of company valuations that have been affected by these decisions are; debt, earnings multiple and profits.

At a time in which businesses have needed to seek government support, the ‘debt’ aspect of the valuation will be impacted upon significantly. UK Government HM Treasury statistics from 13th December 2020 stated that the Covid-19 business loan schemes totalled as follows:

Type Total approved Total applications Approval %
CBILS £19.64bn 186,522 44.3%
CLBILS £4.97bn 1,077 62.7%
BBLS £43.54bn 1,887,967 75.8%
Future Fund £0.976bn 1,432 67.8%

Source: UK Gov HM Treasury Covid-19 Business loan scheme statistics

Companies that have taken a Covid-19 loan, or any other financing during the pandemic, are likely to have increased the value of debt on the balance sheet, thereby adding to the debt deduction that will be made when valuing the company.

It was initially suspected that earnings multiples would fall as a result of the pandemic, thereby reducing the value of companies. However, information released at the end of December by MarktoMarket suggests that this has not been the case across the board. The data suggests that multiplies have remained at pre-pandemic levels. This is despite the drop off in deal volumes experienced between April and August when compared to last year. The data also suggests that deal volumes were 10% higher in November 2020 when compared to November 2019, which is not something that was expected at the beginning of the pandemic. While earnings multiples will obviously vary from sector to sector, our own experience in the East over the past year would mirror these views.

Any change in company profits as a result of the pandemic will almost certainly alter the value of the company. Earnings based valuations generally consider both historical and forecast yearly profits and apply a weighted average before applying the earnings multiple. Whilst this approach will dampen the effects of a particularly bad year, unless these profits are forecast to return to previous success, the companies’ value is likely to continue to decrease. The inverse is also true for companies which have achieved higher profits than normal. If these profits are forecast to continue due to changes caused by the pandemic, for example home working, then the company’s value may continue to increase in the future.

If you require a valuation of your business, please do not hesitate to contact the Ensors Corporate Finance team.

 

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Ben Croston

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