I don’t know of anyone whose business wasn’t affected, at some level, in 2020. Businesses were either on the COVID slump or the COVID bump.
Some businesses, like gyms, may have lost customers permanently as people brought those experiences into the home. For restaurants and stores near big commercial office centers, it could be years before they get back to pre-COVID numbers.
On the flip side, there are industries that saw a definite COVID bump. Not only did the pandemic not affect them negatively, it gave a substantial boost to their revenue.
So whether you were like the majority that had a COVID slump, or you’re one of the few lucky ones with a COVID bump, the question is how does that affect your value?
What we’re seeing out in the marketplace, for those with a slump or lost revenue who didn’t lose customers, those companies are still saleable. The number of buyers out there means the market is still strong, even for businesses that took a hit during the pandemic.
What we’re seeing is that those businesses are still getting pre-COVID values. They’re getting cash at close for today’s value and then an earnout or some other kind of alternative financing to cover the gap between where the business is today and where it will be in the next year or three.
That means those businesses who saw a decline (but no significant customer loss) can still get out today and get full value, even if their company isn’t back to pre-COVID numbers yet.
For those businesses that only saw a short, maybe 90-day slump, those businesses are not only saleable, but they may achieve a higher multiple because they showed they are somewhat pandemic proof.
For companies that had a COVID bump, valuations can be tricky. When valuing a business, we recast the financials to reflect standard operations. That means we “add back” one-time expenses like unusual legal fees or repairs for storm damage.
So now, when buyers see a one-time boost due to COVID, they expect to negatively add that back as well. Basically, they aren’t going to value the business based off 2020 performance. They want to show what 2021/2022 will be like.
The takeaway: Buyers have been more empathetic than I expected and will provide allowances for a COVID slump, as long as the fundamentals of the business didn’t change. But on the same front, they’re also sophisticated enough to know that they’re not going to pay off a one-time COVID bump without some solid justification showing how those sales will convert to ongoing business.
Jim Friesen, MBA, CPA, CMA, CM&AA
Partner | M&A Advisor