Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Will it ever be the same again?

The beginning to 2020 has been interesting so far. We went from the highest reported DOW Jones average in February, to a 30 percent drop in market value a month later.  But what does that mean for values of privately held companies?

Don’t miss: Business valuation during a pandemic

To answer that question, we must know three things:

  1. Investor expectations
  2. Cash flow expectations
  3. Growth expectations

Let’s begin with ‘investor expectations’, or the required rate of return to entice investment. Will COVID-19 change investor’s rates of return when they invest?  Maybe, time will tell. I tend to believe as humans we adapt and change until ‘change’ is ‘normal’. All else being equal, if investors require a higher rate of return in the future, asset values will decrease.

Will COVID-19 change expected cash flow? Absolutely, over the short-term for most companies. Long-term cash flow impacts depend on the staying power of COVID-19 from season-to-season and even year-to-year. A decrease in cash flow will decrease asset values.

Will COVID-19 change long-term growth expectations? This is very difficult to assess because we, as appraisers, think of the long-term growth rate as a perpetuity growth rate. I think it is reasonable to decrease the long-term growth rate by 10 to 20 basis points currently. A decrease in the long-term growth decreases value.

So, all three impactful inputs to valuation presently indicate a decrease in value for privately-held companies. Time will tell what the new normal is for our economy, but remember, we overcame 2001 and 2008.

If you have questions on any of these programs, please contact us. For more information and resources on COVID-19, see our coronavirus page.

For more information on how Henry+Horne can help with your Business Valuation, check out our Services page.

Michael R. Metzler, Director, CPA, ABV, CMA, CGMA, ASA