COVID-19 & the Federal Budget - Effect on Business Valuations & Buyers

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COVID-19 and the Federal Budget – The Effect on Business Valuations and Buyers

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COVID-19 and the Federal Budget – The Effect on Business Valuations and Buyers

By , October 14, 2020
federal budget_business valuations

2020 has been a very unusual year – drought, bushfires, COVID and most recently a national budget like no other with massive amounts of government stimulus to shock the economy into recovery.

Many business owners have been asking us what effect this will have on the value of their business and the likelihood of buyers being available in the market to purchase the business when ready to sell. The answer, of course, is it depends! Firstly, there are many buyers available in the market today and many are “cashed up” and actively looking for acquisitions, especially in the mid-market where businesses are often more resilient.

The issue is that in times of uncertainty and higher risk, and 2020 is definitely that, buyers become more cautious and risk-focused. Higher risk equals lower valuation, so anything you can do to reduce risk on your business is a good thing – both for you as the owner and for any potential buyer.

When analysing any investment, including investment in a private company, the value is based on the future economic benefits that are expected. This is especially difficult at the moment, as recent history may not be a reliable predictor of future performance and the level of uncertainty is at all-time highs. On top of that issue, the rate of return or cost of capital (this determines the multiple to be paid) is also difficult to determine. The COVID recession hit quickly, and we have been, at least partly, protected by the massive government stimulus (also the case in the GFC). Many are predicting the “real COVID recession” will begin in early 2021.

Finally, we have a two-speed economy; those badly affected by COVID – travel, tourism, hospitality and entertainment – and those who have “benefited”. Accounting firms are all very busy, food, tradies etc. Some businesses’ valuation will drop significantly, and others have probably already increased.

At times like this, buyers are uncertain – the risk is the enemy – and de-risking the business is important. Buyers are fussy, they will be more likely to undertake comprehensive due diligence and research. The more preparation you can do the better.

For more information on how to de-risk your business in the current economy, get in touch to speak with a Succession Plus business adviser.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.

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