June 23, 2020
How has Covid-19 changed the business of valuations?
How has Covid-19 changed the business of valuations?

Victoria Cawdron, Registered Business Valuer, Valuation Consulting

In the world of business and intangible asset valuations, we need to understand three important things about the asset we are looking at – its past, present and future. 

The first two areas are generally not too difficult to understand.  To understand the past, a review of the business’s or asset’s historical performance will explain how it has been used, by whom and what revenues it has generated.

Getting to grips with the present is not that hard either.  It involves looking at the current ownership of an asset and how it is being used today.  So, is a trade mark registered and properly protected? Are the same products being sold?  Most of these answers are factual.

Then things get harder as we look to the future.  “Where is it going?” has always been a difficult question to answer, but it is an important one.   Something that has been successful in the past, may not have a future – or vice versa.  For instance, technology or software get outdated or any product can simply lose out to the competition.  Anyone used WordPerfect to draft a document recently?

Up until about the end of February this year we were able to get a reasonable gauge on a business’s prospects by looking at historical trends and management’s projections and general market conditions.  With a few robust but fair questions, it was possible to assess whether projections were reasonable, ambitious or just pie-in-the-sky against the economic environment at the time.

Our preferred method of valuation is to look at discounted future cash flows.  Setting the discount rate is key.  Until Covid-19 reared its ugly head, it was never an easy task, but at least we knew what the wider economy was doing.  Then Covid-19 came along and compounded the difficulty of assessing the future. 

I have spent a fair amount of time reading articles and watching webinars to try to get a consensus view of where the economy is headed.  The only area of consensus seems to be that hard times are being hidden behind all this sunshine and that the economy won’t just spring back to normal the day after lockdown.  What is very noticeable is the different expectations of commentators.  Are we heading for a v-shaped dip where things get back to normal quickly?  A u-shaped dip where we’re in the doldrums a little longer, but eventually get back to normal and once recovery starts it will be relatively quick.  Or a Nike tick shape?  So, a quick drop and a much slower recovery.  And whatever the shape of the dip, will the post-Covid world look the same or will we, say, all be working from home and cycling everywhere when we do venture out?  There certainly is a movement for “Build Back Better”, giving the natural environment a bigger say in how we live.

We need to deal with this economic uncertainty in valuations.  In some cases, it’s more straightforward than others – a basic food business is more likely to be business as usual than an entertainment venue, but what about, say, a clothing manufacturer?  Is change long term or short term?  Management know their business best – but we need to measure up their knowledge against a very unknown outside world, balancing optimism against an excess of caution.  Not an easy set of scales to balance, but one where Valuation Consulting has extensive experience across the years and across many sectors and business sizes.

To find out more about brand valuation email Victoria Cawdron at victoriacawdron@valuationconsulting.com 

Brand Valuation

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