In the first blog in this series we proposed that 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: has what a seller wants changed as a result of COVID-19 if all other things are equal; and
- The potential buyer perspective: has what a buyer is willing to pay changed as a result of COVID-19 if all other things are equal?
In the second 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.
In the third blog post we discussed the second perspective, that of the owner and looked at what considerations and owner has when selling their business.
In the fourth blog post we discussed the third perspective, that of the potential buyer and looked at what other considerations are part of setting price.
In summary, the answer to the question of how will valuations change post COVID-19 is that it depends!
What we know is that the COVID-19 pandemic has created a “crisis of uncertainty and fear.” And it is that fear about the future of business and economic conditions that may impact both Valuation and Price. What this series of blogs has hopefully also shown is that those impacts are not necessarily the same for buyers and sellers and are never uniform across businesses or industries. It also depends on what jurisdiction you are in. Here in Australia our valuations (as measured by EBITDA multiples) for SME businesses (which we define as those with less than $5m in EBITDA) are lower than other parts of the Western World. We aren’t sure they can fall significantly enough to make a real difference given that they are lower in the global context already.
We have briefly explored what the seller’s and buyer’s mindset brings to the Value and Price conversations and history provides clues.
Some of the larger global brands began during economic recessions and depressions. GE and Disney began in the economic downturns of 1873 and 1923-24 respectively. And Hewlett Packard started-up during the Great Depression. Did their founders and leaders have doubts and crises of confidence? Most probably yes. But what was their overall mindset? No doubt it was counter-intuitive, open and opportunistic. They saw value where others did not, they saw “up” when others saw “down.”
“Survivalist Entrepreneur” is a term coined by UCLA Professor Ivan Light who has made a study of how some of the richest family empires today began simply, humbly and small during the Depression years. They bought small businesses that addressed or could pivot to the consumer needs of the economic times. They saw High Value where others saw Low Price. They saw “opportunity” where others saw “hard work.” Simplot and Marriott, are just two brands linked to this kind of entrepreneurial spirit. We wonder how these individuals approached their due diligence and valuation conversations in their times.
Our clear message is that mindset matters. Feel the fear and do it anyway. Don’t be frozen in it. Embrace the uncertainty, and seek help from your mentors and investors when it comes to the valuation and working out what to offer as a price. Most importantly, don’t stop! If you do, you will miss the opportunity to find out and learn what the real seller considerations are that drive price. You may also get to discover where real Value lies.
That is going to be helpful in whatever market conditions you find yourself in.
Lui Pangiarella & Ak Sabbagh