The recent COVID-19 outbreak is creating an atmosphere of uncertainty across the globe. No business is completely sheltered from its effects. While some businesses are pivoting their business models and innovating to meet changing consumer demands, the majority of businesses are struggling in some capacity, making it nearly impossible to forecast six months…one year…three years into the future. Present challenges and future uncertainty directly affect business valuations.
What is fair market value?
According to the International Glossary of Business Valuation Terms, “fair market value” is defined as “the price expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of relevant facts.”
How is business valuation determined?
A fine-tooth assessment of cash flow, growth and risk factors allows a person to determine the fair market value of their business.
Cash flow: The impact of COVID-19 has resulted in the temporary closure of many businesses. Other “essential” businesses remain open but a vast percentage of consumers are concerned about contracting the virus and are choosing to limit their interaction with these places of business or avoid them altogether. As their revenue decreases, their profit margin decreases, reducing cash flow.
Projected growth: Another facet of business valuation is the company’s growth forecast for the foreseeable future. In the case of the current pandemic, and fueled by layoffs, pay cuts and job loss, both projected industry growth and national economic growth naturally decrease, directly impacting business valuation.
Risk factors: Both internal and external risk factors directly impact business valuation.
- Internal risk factors: These include earnings history and expectations, cash reserves, customer and employee satisfaction and supply-chains.
- External risk factors: Coronavirus or anything else that a company cannot control that affects the well-being of a company, is considered an external factor. They can be industry-specific or related to the local, regional or national economy.
If you’re thinking about buying or selling a business right now, let us provide you with a solid business valuation so you can confidently navigate these uncertain waters. Reach us at 612.331.8392 or by email at firstname.lastname@example.org.