Business Valuations Post COVID-19, The Impact of Fear, Uncertainty and an Economic Downturn – Post 1 of 5

This is the first in a series of 5 posts exploring the impact of COVID-19 on Australian Business Valuations.

The economy in Australia is undergoing a cataclysmic shift – the aftershock of a global pandemic. Just two weeks after Australia officially started self-isolating the Australian Bureau of Statistics reported in its second survey of Business Impacts of COVID-19:

Two thirds (66%) of Australian businesses reported that their turnover or cash flow had reduced as a result of COVID-19…
Nearly half (47%) of businesses made changes to their workforce arrangements as a result of COVID-19. For some businesses this included temporarily reducing or increasing staff working hours, changing the location where staff worked (including working from home) or staff being placed on leave.[1]

How will this impact on the Australian economy? Westpac has estimated that the Australian economy, as measured by GDP, will contract by 8.5% in the June Quarter.[2] To put this into perspective, the largest quarterly reduction in GDP recorded by the ABS since the current measure was introduced in December 1959 is 1.2% in December 1982. In the period from the March 1982 quarter to the March 1983 quarter the economy shrank by 3% over five quarters. The Westpac forecast for our current situation is almost three times that. But all in one quarter – not five!

It is also clear that no-one can accurately predict what the economic recovery will look like (is it V shaped, U shaped, W shaped or L shaped) and what actions local and international governments will take to accelerate a recovery.

A question we keep hearing from potential buyers of SME businesses is “will valuations come down” and “when should I be buying a business?” Similarly, we have recently had owners of SME businesses ask, “how much is my business worth today?”

There are many opinions about what will happen with business valuations in the post-COVID-19 era. Those opinions tend to err on the side of downward pressure on valuations. But we aren’t so sure about that, particularly in Australia where valuations are lower compared to other Western countries.

Before we start to discuss this in more detail, we have to outline what we understand by the question of “Will ‘valuations’ be lower?”

Firstly, a valuation is an attempt to objectively estimate what a business is worth.

Secondly, while the question is often framed about “valuations” it is possibly more correct to talk “price” which then introduces the non-objective components to the price that businesses sell for.

We propose that there are three perspectives to look at:

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?”

Over the next three posts we will explore each of these perspectives before summarising views as a final post.

Lui Pangiarella & Ak Sabbagh