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In the first of this blog series we proposed that the impact of COVID-19 on the price of an asset or business needed to be considered from three perspectives:

  1. 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”;
  2. 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
  3. 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?”

This blog post deals with the first of those perspectives – the objective view or what is a business worth objectively, sometimes called Fair Market Value.

Fair Market Value for an asset is simply the estimated exchange value between a knowledgeable willing seller and a knowledgeable willing buyer.

This is an impartial and objective test in business valuation and can be reduced to two key factors:

  1. How is the business expected to perform? and
  2. What is an appropriate return for this industry that reflects the level of risk in the industry?

COVID-19, or the expected flow-on economic downturn, has impacted both current and future performance of businesses and, potentially, the perceived risk profile of industries and this is no way uniform across the Australian economy.

For example, three industries where industry growth rates could be expected to increase post COVID-19 are:

  • Manufacturing (if some of the talk about strengthening local supply is realised);
  • Outsourced business services and process automation (if some of the talk about bringing back offshore operations is realised); and
  • The pre-infrastructure development service sector hasn’t missed a beat in the past few months with work continuing in the planning and development of large civil infrastructure projects.

On the flipside, some sectors where industry growth rates that will be reduced from pre-COVID-19 times include:

  • Tourism, travel and accommodation sector (as a result of international border restrictions); and
  • Bricks and mortar non-food and alcohol retail (as a result of a potential structural shift to online).

Similarly, the perceived risk of industries may have also changed as a result of COVID-19.  This is harder to visualise as it is inextricably linked to whether there has been an impact on business performance as a result of COVID-19 (which is picked up to a large extent in point 1 above).  It is simpler to just contrast the industry structure rather than point at specific industries.  Industries that are reliant on discretionary consumer or business spending and are project based are likely to be more volatile in this post COVID-19 era compared to industries with long term contracts for essential services.

Remember that all the above is written today in the context of fair market value.  Not yesterday or tomorrow.

Let’s use a hypothetical example of a business pre COVID-19 that had future maintainable earnings of $2 million and was expected to grow at 15% per annum.  It will be worth more or less post COVID-19 dependent on whether future maintainable earnings have been impacted (and which way – up or down) and whether the growth rate has been impacted (and which way – up or down).


So, what does it mean if you get a lower, or higher, objective valuation? It means that the business is objectively worth less, or more, than it once was as your view of its prospects have changed.  But does that really matter? The valuation has changed because the business and its prospects have changed not because it was “expensive” before and is now “cheap”.

Being impartial, what do you think?  If you were sitting on the sidelines (i.e. you weren’t the buyer or the seller) and observed 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?   Why?

We’d love to hear your thoughts in the comments…

Lui Pangiarella & Ak Sabbagh


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