by Tony Carter
It seems like every other conversation I have with colleagues, clients and business owners these days includes the line “in these times of uncertainty…”

As valuers, we are always thinking about uncertainty.  At a basic level, all the valuer is asking is – what are the expected future earnings of the business, and what is the uncertainty (or risk) that those earnings will not eventuate?

Recent events like the catastrophic bushfires in Australia and COVID-19 globally have undoubtably increased the level of economic uncertainty.  What is unusual about these events is that while they were always a possibility of occurring, I think we can all agree that the scale and swiftness of their effects on business were very unlikely to have been accurately predicted even a month or two before the events.

Importance of the Valuation Date

Dealing with events like these highlights one of the basic principles of valuing a business – that the value is always as at a specified point in time, called the valuation date.  Further, the valuer cannot use their hindsight of subsequent events in preparing their valuations.  It is important that you have a clear understanding of what this means so you know what is and isn’t taken into account in your valuation report.

There are two types of subsequent events:

  1. Those that affect value (which should not be considered unless the facts were known or knowable at the valuation date)
  2. Those that don’t affect value but provide evidence of the value as at the valuation date (which may be considered).

It is this first kind of event that the bushfires and COVID-19 fall into.

A Recent COVID-19 Example: Café Business

One example I have come across in the last few months that illustrates this type well is the valuation of a café business for a Family Law property settlement.  I was engaged to value the business in March 2020 as at 31 December 2019.  By the time the valuation was being prepared, the coronavirus was rampant in NSW and the café was subject to mandatory shutdown.  Further, it was unclear how long the shutdown would be in effect and when the café could open its doors again, indeed if it ever would.

The café had healthy performance up to January 2020, and while the owners advised me that around February 2020 they were starting to become concerned of the effect of COVID-19 on their business, it was uncertain even then how bad things would get and they certainly had no concerns back in December 2019.

As a valuer, the challenge is answering the question of what is known or knowable as at the valuation date.  Should the business be valued as a going concern with reasonable profits, or a business that is unlikely to reopen?

Unfortunately, while taking into account extreme changes in economic conditions between the valuation date and the preparation date seems like commonsense, it simply should not be done.  A better approach would be look that the purpose and timing of the valuation report, and perhaps pulling forward the valuation date allowing the valuer to take into account recent unforeseen events.  This can be especially relevant for business valuations within the family law context as depending the length of time a matter has gone on for, a valuation done early in the piece or as at an older date may no longer be seen as reasonable by all parties given recent events and the current economic climate.

Just like many aspects to business valuations, there is no one-size-fits-all approach to considering the effects of COVID-19.  In the example above, it would likely be unreasonable to expect back in December 2019 that anyone thought a virus in China would affect a café in NSW, but it could be more likely that an Australian business that imports goods from China would be considering the effects of COVID-19 on their operations back in the early days of the virus.  A valuation of that business as at 31 December 2019 may very well take into account COVID-19.

While COVID-19 presents several new factors to consider, the fundamental drivers of value remain the same.  Valuations are about forming projections of future earnings and assessing the risk or the earnings.  What is important is that you engage a valuer that understands the drivers of value and risk for your business.

If this article has raised any questions for you, your business or its valuation, contact Tony Carter at Lambourne Partners on 02 4969 6600 or in the form below for an obligation-free chat about how we can help you.

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