The impact of COVID-19 on the value of businesses

Has COVID-19 wiped out business values and should business owners pause all large strategic decisions?

by Adrian Howells

Since the Coronavirus (COVID-19) pandemic began early last year, businesses have been faced with continued uncertainty. This, coupled with the prospect of a no-deal Brexit (now abated), means that for many businesses, large scale strategic plans have been shelved as directors may be fearful of value attrition. However, it remains true that uncertainty breeds opportunity and our experience of helping business owners through the course of the pandemic is that for many, values are holding up firmly, buyers remain ready and willing and that, perhaps counterintuitively, it is proving to be a very busy period for companies buying and selling.
Whilst unlocking embedded value and accelerating growth in a business at this moment in time might feel unachievable, it remains the case that good planning is the key to getting ahead. Whether your aim is to ensure your business survives or thrives, there are several factors to keep in mind.
You might be considering investment for growth, making an acquisition or executing a disposal; in all cases, your desired outcome is likely to be the same – achieving the maximum return possible. Jonathan Thornton and Richard Hill of Quantuma’s Corporate Finance team have produced a handy guide to valuing businesses during the pandemic (which is available here). Therefore, here are a few pointers regarding business values, with a particular focus on business exits.
1. How might I value my business?
Business valuation is very subjective, particularly for smaller firms, where there may be customer concentration, key-person dependency within the management structure, or turbulent trading patterns.
Nevertheless, there are various techniques that can be used to give a defensible guide to valuation.
Recent transactions in relevant sectors involving similar-sized businesses provide a great basis for determining defensible valuation ranges. Information is not always publicly available in respect of smaller transactions, however our experienced Corporate Finance team is able to navigate the myriad of transaction data and together with their extensive deal-doing experience provide a robust valuation range.
Another option is to look at multiples being achieved by companies in your sector that are listed on the public markets, where valuation data is automatically available. Naturally, a significant discount factor should be applied to account for the much-reduced liquidity of privately-held shares. This can provide a good sense-check to your initial workings.
A final technique is to use a discounted cash flow, looking at future earnings of the business and aggregating these to determine today’s value thereon, accounting for the risks associated with future earnings.
Whilst business earnings may have been impacted by the COVID-19 pandemic and associated lockdowns, for businesses which have not suffered too badly, buyers are generally being sensitive to the fact that suppressed earnings should only be a temporary feature. Therefore, forecasts will typically be prepared on a ‘business as usual’ basis, helping to support values.
Overall, for businesses which have not suffered extensively during 2020, valuations are generally remaining firm.
Ultimately, the value of any business is what a willing buyer is prepared to pay. As such, valuations, now more than ever, depend on a huge number of variables and it is well worth seeking professional advice to assess your expectations.
2. Who might buy it?
Depending on what stage of the lifecycle a business is at, buyer options tend to vary. Fast-growing and earlier-stage businesses may be suited to venture capital or private equity funds that typically invest for growth capital returns. For more steady-state businesses, trade sales are often optimal as the buyers will understand the business as well as the market and can typically slot acquired operations into their own. For smaller businesses, it may be more appropriate to look to high-net-worth investor groups that look to invest modest capital in a range of companies.
Finding the right buyer for your business is critical to maximising the value you are able to realise and ensuring the deliverability of a transaction.
At Quantuma, during the pandemic, our team of experts have helped many owners sell their business or parts of their business to willing buyers. In the case of non-stressed businesses, there remains a lot of appetite amongst buyers and we have found them willing to engage as normal. In the case of stressed businesses who have not performed as well as they might have hoped but need or choose to realise value, we have secured good deals, allowing them to sell parts or all of their business to parties looking to invest in and turnaround stressed assets. If you are a buyer looking for stressed or distressed opportunities, you can sign up to our interested parties database here
3. What might I do to increase the value of my business?
If you or your client are considering selling a business in a few months’ or years’ time, rather than right away, taking advice and investing that time and effort now will positively impact the value of the business at the point of sale.
This may include managing working capital effectively, optimising the capital structure and ensuring an appropriate debt/funding structure. These factors go hand-in-hand with more obvious activities such as growing sales and profits, ensuring contracts are all in order, improving margins as well as efficiencies and ensuring stable financial performance.
Owners may look to acquire relevant businesses in order to grow and now is an opportune time to consider such options as those businesses which are stressed can usually be acquired at a reduced price. Owners may also look to expand into new and more popular markets as well as integrate a strong Tier 2 management team who can readily take over, so that as an owner you can gradually step back from the day-to-day running of the business. COVID-19 has highlighted the importance, now more than ever, of robust financial and management information and planning.
4. How long will the process take?
We have transacted hundreds of deals over the years and each takes a different amount of time, largely depending upon the complexity of the business being sold, the intricacies of the transaction and also drivers to the disposal process. We have noted a slight increase in the time non-stressed transactions are taking during COVID-19 as whilst buyers remain willing, they are naturally cautious. To run a full process with a view to achieving maximum value, it might take six to eight months. To achieve maximum value and the smoothest transaction process, planning and preparation should commence several months or even a few years before the eventual sale process commences in earnest. Therefore, the earlier a business engages with us, the more value we are able to add to the process.
5. How much tax might I pay?
Getting your tax structure right can make a real difference to your personal outcome when you choose to exit your business. A structure which involves selling the shares in your business (rather than the trade and assets) will mean that you can exit using capital gains tax (CGT) rates. At present, the CGT rate is 20% (after Business Asset Disposal Relief where your first £1 million of lifetime gain is taxed at 10%). However, there has been much noise about increasing the CGT rate to align with income tax rates, with the chancellor commissioning a study from the Office for Tax Simplification (OTS) in July 2020 to look into this. The OTS reported in October 2020 recommending that CGT is aligned with income tax rates, meaning a potential increase in tax payable for owners selling their business from a rate of 20% to as much as 45%.
At the time of writing, it is widely considered likely that the rates may change as soon as the Spring Budget, currently set for 3rd of March 2021 and past experience (including the change to Business Asset Disposal Relief limits in the 2020 Spring Budget) shows that such changes tend to come into force on the day of the Budget. Therefore, owners looking to commence a full exit process are realistically out of time.
However, with the UK back in its third lockdown, seemingly unlikely to be ended before the Spring Budget, there is every chance the date of the Budget may be pushed back or even, given the disruption to the economy and the imperative to incentivise business, it may be that changes to CGT are deferred to a later date altogether.
Owners of businesses with a strong team of staff do still have the option to sell their business tax-free using an employee ownership trust (EOT). An EOT involves selling a company to its staff, preserving both their jobs and the legacy of the business. For further information, see the link to our webinar recording on this subject below.
6. How can Quantuma help me?
During the pandemic, we have been supporting businesses of all shapes and sizes as well as across various sectors cope with the impact the sequence of lockdowns has had on them. Having worked with many business owners over the course of the last year and spoken to other professionals in the industry, we know that whilst the situation may seem bleak, there remains a lot that can be done to help you or your clients maximise the value of their business.
We have recently launched a new programme of support called ‘Building financial fortitude’ aimed at helping advisers and businesses alike. This programme gives you access to a series of articles, guides and insight, providing practical as well as purposeful information to help see you through this challenging time.
Contact us today to discuss your or your client’s business. We would be happy to share our wealth of deal-doing experience with you and work with you to achieve your or your client’s desired outcomes. Our Corporate Finance team are trusted experts who provide a comprehensive range of corporate finance services to ambitious entrepreneurs and business owners who want independent advice to help them take major decisions about the future of their business. Having won over four awards over the last two years for our work in the Thames Valley and Solent regions and completed a vast array of transactions, including during the pandemic, we are in an optimal position to help you.
Watch my summary video here:  
For further information, please see below:
Valuing businesses in challenging times: Read more
Guide to capital gains tax: Read more
Webinar: Business valuations in a time of uncertainty (COVID-19). Watch now
Webinar: Employee Ownership Trusts: Efficient exits on an owner's terms. Watch now


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