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Business valuation: Effect of Covid-19 Pandemic on Business Value

2020 has been a year of unprecedented uncertainty for businesses globally as they grapple with Covid-19 and the recession brought on by it. Many businesses have seen reduced cash flows because of low revenues and ongoing fixed costs. Businesses in certain sectors (travel, hospitality and even retail) have been hit worse than others. All these factors would naturally impact business’ valuations as well. Here are some key valuation factors for businesses as well as Valuation Firms in India

Cost of capital shifts: Potential investors in businesses are cautious: while many are buying distressed assets, many are also riding out this period to see where a business is, at the end of 2021. While the cost of capital can be said to be largely unchanged for those with substantial liquidity, for most acquirers, the cost of capital is higher as the required returns from an acquisition are higher. Providers of Business valuation services India will assess every factor associated with the business, and the capital, along with the changes implemented.

Impact on business earnings: With plummeting revenue of the majority of the business, business earnings for 2020 will show losses for many previously profitable businesses. In countries with government intervention, the losses may be lower, however 2020 is a bad year for most businesses globally. There are a few businesses that have excelled in the pandemic because of demand for their products, and they are currently receiving high valuations from Business valuation services Mumbai.

Industry sectors affected: Almost every sector of the economy is severely hit by the Covid-19 pandemic. Auto, Chemicals, Electronics, Solar Energy, IT, Shipping, Tourism, and Textiles are hit severely either due to shortage of supply, social distancing restrictions or regulations imposed. Be it production, service, or outsourcing, every business has been hit on a scale of around 20-80% while some have been wiped out entirely.

Effect on business value – earnings expectation and risk: With the unprecedented fall in the sales of products and services, the earnings and revenues will be a fraction of what it used to be. The additional threat of wiping out of businesses or halt looms over them in times of crisis. There may be distress sales and/or consolidations among players in 2021. However in many cases, the question is two fold:
1) Can the company revert to pre-pandemic cash flow levels and if so, when?
2) Is it possible that serious restructuring (either internal restructuring or M&A activity) can help some companies to come out of the pandemic more efficient? These are questions that are usually asked by Valuation Firms in Mumbai and other cities, as this is also a good time to identify and evaluate the businesses’ real risk-reward profile