Covid-19 has not only changed the way we live our lives, but it has also changed the laws governing business valuation services.
As a business owner, it becomes essential that you are aware of the KSF (Key Success Factors) of your industry and business.
Business appraisal is an essential part of owning a business which can lead to steady and accelerated growth in several cases.
When your business has been valued, you figure out whether the business will be able to sustain an unfortunate situation.
The value of any company is determined by factors such as:
- Balance sheet
- Reputation
- Intellectual property
- Trade secrets
- Assets
- Cash flow
And much more.
This is why you must understand everything related to the business valuation services sector.
For more details about the same, click here.
The Challenges
To begin with the article, it would be best to talk about the challenges and then move on to the trends.
The current situation has encouraged valuation professionals to use the discounted cash flow (DCF) method. It’s a variation of the income approach since it is directly related to what’s being valued.
That said, each of the approaches have their set of pros and cons.
As the year goes by, the following business valuation challenges shall need to be tackled smartly:
- Business values shall be impacted due to higher discount rates in the wake of the pandemic. The uncertainty and risks related to businesses have increased as well. This tends to affect the risk profile of any business through the valuation services process.
- There has been a difference between how businesses were affected by Covid-19. The valuation analysis will take into consideration the financial condition due to specific aspects.
- As mentioned before, the DCF method of valuation is being used to value businesses. It requires valuation professionals to take a deeper look into how the management and business’s long-term outlook match.
- The most recent financial history of a business cannot be used as a reliable source to show its value. This is because the business’s earnings, past revenue, cash flow, etc., do not reflect its financial conditions in the post-pandemic world. In fact, the earning power outlook is not clear.
- The WACC or Weighted Average Cost of Capital depicts the ‘discount rate’ that is used to derive the equivalent present net value of the prospective cash flow at invested capital level. There has been a rise in several market-derived WACC inputs that were otherwise underlying. These reflect the increase in risks and uncertainty due to Covid-19.
- Valuation services will not be focusing on the market transaction of non-publicly-traded companies that occurred before the pandemic hit. Since the Guideline Transaction Company Method (GTCM) is used to derive business valuation indications, they become less reliable. The market multiples are now dated, show the price level predictions of pre-Covid-19 outlook factors and earnings, and do not provide proper details to work with.
Recommended, Importance of Business Valuation for companies
Methods Used for Valuation
In the corporate finance sector, you often hear about business valuation. It includes a comprehensive and exhaustive analysis of the business to best determine its state in the current market.
Depending on the business, valuer, and industry, the tools used for the valuation process may change.
The same goes for the methods used by valuation services professionals, like RNC. There are numerous ways apart from the ones mentioned below.
-
- Times Revenue Method
The revenue generated over a particular time frame is taken into consideration. It is applied to a multiplier depending on the current economic and industry environment. In simpler terms, the pandemic might have increased the value of a tech company by 3x its previous revenue, while a business in the F&B industry might be valued at 0.5x revenue.
-
- Market Capitalization
Considered to be one of the easiest methods of valuation, the calculation process is carried out by multiplying the business’s total outstanding shares with its share price. Let’s say a Company A traded at Rs. 89 as of 8th Feb ’21, and its outstanding shares were 8.55 billion, then the business will be valued at Rs. 89 x 8.55 billion = Rs. 760.95 billion. Beginner and expert valuation services providers can use this method with ease.
-
- DCF Method
Based upon the prediction of cash flow in the future, the DCF method of valuation adjusts this value to derive the current value of the business. It’s similar to the Earnings Multiplier method that will be discussed next. The only difference between both these valuation methods is that it takes into consideration inflation to accurately calculate a business’s current value.
-
- Earnings Multiplier
If you want a clearer picture of the value of any business, then it is advisable to use this method. Here, your valuation services provider will adjust the current profits to expenditure ratio taking into account the current rate of interest. It is the financial metric that creates a frame for the business’s current stock price for its Earnings Per Share (EPS).
Other valuation methods used are:
- Liquidation Value
- Book Value
- Terminal Value
- ROI-Based Valuation
The pandemic has changed the world as we know it.
Some industries and markets were drastically affected by it, while others seemed to have kept afloat during these times.
One thing has become certain throughout the outbreak of the novel coronavirus.
It is that business valuation services will have to step up their game to meet the demands of the changing market and help businesses get what they deserve.
It has always been a dynamic industry, now more so than ever.
At RNC, we carry out the valuations as per various International Valuation Standards. As a leading valuation advisory firm that renders valuation consulting services for various purposes, we understand your need to hire the best.
Reach out to us and get the best valuation services for your business.