insights
Corona shock: Approaching your bank for funding
We reflect on how to approach banks when seeking access to funds under the Coronavirus Business Interruption Loan Scheme (CBILS) or BoE Corporate Financing Facility.
How to reflect Coronavirus when assessing the value of a business.
Web-conferencing software Zoom is now worth more than the world’s 7 largest airlines put together – a startling statistic which underlines current volatility and uncertainty around business valuation.
For valuation opinions given at a date in the past, the question for valuers is what was known or knowable at the time. China notifying the World Health Organisation of a “pneumonia of unknown cause” on 31 December 2019 is the starting point after which valuations, whether for divorce, tax, or probate, must reflect COVID-19.
Early evidence from published deal statistics suggests that prices for SME deals were down 10% over Q1 of 2020. Over the same period, the FTSE fell 35% and then recovered to a 25% fall. This undoubtedly shows the extent to which stock markets are driven by sentiment and weight of money, whilst the SME deals completing in the quarter would already have been in diligence, and if a strategic move, the buyer and seller were less impacted?
2020 will be a difficult year in which to value businesses given the level of uncertainty. Most businesses will have less cash or more debt coming out of the crisis and this will directly impact on valuations. But what about the performance effect? EBITDAC is the new acronym to have emerged out of the crisis, standing for Earnings Before Interest Tax Depreciation Amortisation and Corona. This tries to get at the underlying performance of a business having adjusted for the impact of Corona. The logic is that one must now look at 2019 results, EBITDAC for 2020, and forecasts for 2021 and beyond when valuing.
Currently benchmarking multiples is also difficult. If using quoted company benchmarks, it’s important to compare like with like. If the market has marked the price down is the resultant multiple being calculated against adjusted profits? Or against historic unadjusted results? If you were to use the former to compare with EBITDAC you’re mixing apples and pears.
Historic results from 2019 don’t look too relevant in the short-term, and so there will be more emphasis on forecasts. This is challenging given the levels of uncertainty around COVID-19 even without Brexit! In theory one should use discounted cash flow and reflect the risks in either the forecasts or the discount rate (but not in both). Yet most SMEs will find it very challenging to produce meaningful forecasts. The likely outcome is the use of multiple scenarios, and more frequently updated valuations.
PEM Corporate Finance have had many conversations with market players to gauge what is likely to happen. Here’s what we’ve learnt.
Sector matters – Cambridge’s technology businesses are likely to be sheltered somewhat as investors and corporate buyers alike are less likely to discount prices in strong sectors. But even then, outcomes will be nuanced with, for example, software likely to be more resilient than hardware.
Early Stage – start-ups and young companies will face headwinds, with a new normal likely to involve fewer rounds, more syndicated deals and more caution on valuations.
M&A – our experience is that deal prices are holding up for transactions that were well advanced in Q1, and where businesses are strategic to buyers.
Private Equity – the investment community is “open for business” but deal doing will be cautious, slower, and valuations may be 20—30% lower in the short-term.
Advisers – a recent survey of M&A advisers from data provider MarktoMarket found that most UK SME advisers anticipated a reduction in valuation of up to 25% in H2 of 2020.
In summary, if you’re a strong business and strategic to your investor or purchaser you may feel little effect, but most businesses could expect a valuation reduction in 2020 of up to 25%. The big question is how quickly valuations will recover as we go into 2021.