In the first blog in this series we proposed the impact of COVID-19 on the price of an asset or business needed to be considered from three perspectives:
- The objective perspective: What is the business worth and has that changed as a result of the impact of COVID-19? Let’s just call that “fair market value”;
- The existing business owner’s perspective or to frame this as a question “has what a seller wants changed as a result of COVID-19 if all other things are equal?”; and
- The potential buyer perspective, again framing this as a question “has what a buyer is willing to pay changed as a result of COVID-19 if all other things are equal?”
In the previous blog post we discussed the first perspective, the objective perspective and proposed that you cannot generalise what impact COVID-19 will have on the price of businesses.
Yes, if business performance or prospects have reduced as a result of COVID-19 then yes it should be worth less. The corollary is also true, if business performance or prospects have increased as a result of COVID-19 then it should also be worth more.
However, as we said in Part 1 of this blog series, fair market value is not the same as the price because it assumes equivalent willingness and knowledge of both parties. That is almost never the case.
In this blog, we deal with the impact that COVID-19 may have had on the price that a seller is willing to accept for their business regardless of how the objective value of that business has changed. Seller’s don’t just think about whether they are receiving a “fair price” they also consider a number of other factors that are not related to the business performance or prospects, such as:
- Whether they believe the price adequately rewards their effort to build the business;
- How reliant they are on the proceeds from the sale for their future needs;
- How important the preservation or enhancement of their legacy is to them;
- Whether they are more or less optimistic or pessimistic about the industry and business prospects than the “consensus” combined with their personal risk appetite; and
- Whether they feel like they have, and the business has, “gas left in the tank”.
Some owners may be willing to accept a lower price post COVID-19 if:
- They are financially secure already and COVID-19 has not changed that position and they already prepared for the change;
- They believe that COVID-19 will have a lasting impact on their business;
- It has impacted their personal risk profile and they now crave greater certainty (lower risk profile) of a price today versus the additional autonomy and status that a larger price tomorrow may give;
- They are stressed or at the point where the COVID-19 has become the “straw that breaks the camel’s back”;
- They have a high personal high debt level that is creating additional financial stress and a desire to de-lever; and/or
- Their perspective on work/life balance and how they want to spend their remaining time has changed as a result of the pandemic.
On the flipside owners may be pursuing a higher price post COVID-19 if:
- They are not financially secure already, or COVID-19 has impacted their savings and they need the additional proceeds to provide for their future;
- They believe that any negative impact on the business from COVID-19 is short-term in nature and conditions will recover;
- They have a higher risk profile and are willing to gamble that the conditions will improve.
- They can prove that the business has genuinely performed in a “pandemic-proof” manner.
If you were a seller of a business that sailed through the COVID-19 unimpacted do you think it is worth more/less/the same as before the COVID-19 crisis?
We’d love to hear your thoughts in the comments…
Lui Pangiarella & Ak Sabbagh