Is COVID-19 affecting the value of my business
Andrew Rogerson
in Business valuations, Sell a Medical Practice, Selling your business
It is hard to be believe but the first official case of COVID-19 or the coronavirus was recognized in the United States on January 21, 2020. As I sit to write this article in late July 2020, that is over 6 months ago.
For many business owners in specific industries such as Restaurants, Bars, Fitness Clubs, Hair Salons and the Travel Industry, the effect on the business and therefore the business owner, employees and landlords has been devastating.
For other businesses in different industries such as Manufacturing, Telecommunication, Business Services and Wholesale Distribution companies there has been some affect, but it has been limited. Some industries such as Construction, Logistics, Information Technology and Packaging have seen a benefit. For example, Residential Construction or Residential Service industries such as HVAC, Landscape and Gardening, Windows and Doors are doing well because the stimulus money from the CARES Act is allowing home owners to spend their money on upgrading their homes now many are working more from home.
SBA loans through the CARES Act help the economy and business values.
One of the lessons of the 2008/2009 Great Financial Recession was that the US Government through the Federal Reserve saw a need to stimulate the economy. However they were to slow to do anything. Why this is important is that it is harder for an economy to recover the more it slows as it takes longer for confidence to return and the new money find its way into the economy.
It is probably helping there is a Presidential election in 2020, but the US Congress through the CARES Act and specifically the Payroll Protection Program (PPP) were able to release $349 billion of funding on March 27, 2020. What was then to follow was an additional $320 billion that the SBA was able to release on April 27, 2020.
What is happening to business valuations?
Businesses are valued for different reasons and use different methods. If a business is being appraised for a divorce, business partnership break-up or another legal dispute, the final valuation is typically based on theory and the opinions of the appraiser.
When selling a business, it is critical to have a detailed business valuation but at the end of the day, the value of the business is what the buyer is willing to take AND the seller is willing to accept. This is the reason it is called Fair Market Value.
If you look at the graphic below, from S&P Capital IQ, it shows some interesting information. This includes:
- In February 2020, the effects of COVID-19 not only were totally unknown but there was no reference point to such an event like this as the last global pandemic occurred just over 100 years ago. As a result, different multiples in all industry sectors took a dive into the red.
- When March 2020 was compared to February 2020, there were declines ranging from 2% decline for the Pharma, Biotech and Life Sciences sector to a 31% decline for the Energy sector.
- As the economy moved through April 2020, May 2020 and June 2020, ALL industry sectors were improving when compared to February 2020. Several industry sectors including Technology, Food Retail and Products and Insurance were turning positive.
The ‘New Normal’ is starting to appear
The ‘New Normal’ describes what the economy will be like after COVID-19 is behind us. Because its now been 6 months since COVID-19 was officially recognized in the US, the economy is adjusting.
Key metrics by Sales Price
The ‘Key Metrics by Sales Price’ graphic below from BizBuySell shows that for the second quarter of 2020:
- Businesses are being sold and transactions are closing. The Median Days on Market only went up by 6 days – from 196 days to 202 days.
- For businesses with a value of less than One million dollars, the Average Cash Flow Multiple was 2.36. For business over One million dollars, the Average Cash Flow multiple was $3.61.
- The most important statistic from the graphic shows that for businesses sold for under One million dollars, the business sold for 92% of the Asking Price. If the business sold for over One million dollars, it sold for 94% of the Asking Price.
Small Business Sales by Sector
The ‘Small Business Sales by Sector’ graphic below from BizBuySell shows that for the second quarter of 2020, there were a total 1,481 transactions at a national level that were able to close. In addition:
- 3% were in the Manufacturing industry sector,
- 13% were in ‘Other’ industry sectors,
- 18% were in Retail including Restaurants
- 22% were in Retail – other than Restaurants and,
- 44% were in the Business Services industry sector.
Rules of the PPP Loan Forgiveness now available
On July 23, 2020, the SBA was able to release the rules of the PPP loan forgiveness program. This will now bring stability to this concern as some business owners were unsure what steps to follow; especially if they were selling their business.
If you were successful in obtaining a PPP Loan and want to see if your loan or part of your loan can be forgiven, the steps to follow are simple.
- Complete SBA form 3508 or 3508EZ and create your documents of support.
- Provide these documents and work with your PPP Lender. They have 60 days to review your request for forgiveness, make a decision and get back to you. Your lenders decision options include Full Forgiveness, Approved in Part, Denied and Denied without Prejudice. If you receive anything other than Full Forgiveness, the SBA has a process for you to follow and this includes obtaining a second opinion from a third party.
What does the future hold for valuing and selling a business?
COVID-19 officially hit the US economy on January 21, 2020. It built momentum quickly. How COVID-19 affects the value of a business is specific to the industry, the location of the business and a set of unique factors. For example, in California, the 6 Bay area counties in and around San Francisco shutdown on March 16; except if your business was an essential service. There are other unique factors such as the strength of the IT industry, whether a business is a union or non-union business, what California regulations touch or do not touch that industry and more.
What is critical is what is important to the business owner or owners. If the time is right to value and sell the business that is as complicated as it should be.
An accurate business valuation is the first step to successfully sell a business.
There are many steps to successfully sell a business. Here is a summary of the Twenty Four steps it typically takes.
If you would like more detail, this is a more comprehensive explanation about selling a business.
If you still have questions about valuing or selling your California business, you are welcome to schedule a 30-minute conversation with me. Simply click this link to schedule a call with me and find a date and time that works for you. The rest happens automatically.
