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