For business owners wanting to sell and people wanting to buy a business, finding common ground when it comes to business value and fair sale price during the Covid-19 Pandemic is a complicated and challenging process.
All of a sudden, 2020 has thrown us a curveball with no previous playbook, and some businesses have been forced to ‘adapt or die’ when it comes to their business model and product/service offering. Many businesses have completely changed things up in order to survive. As an example, Scaffolding companies such as the Sydney company ‘StageKings’ have shifted focus entirely; previously creating large-scale pop-up stages and now creating a whole range of iso-related products such as desks and partitions.
The Pre-Covid methods of valuing a business affected in these times, needs re-thinking. Valuers used to assess financial performance, current markets, stock levels, goodwill and more to come to an educated conclusion on what the business in question was worth but primarily based on historical earnings. Now, mid-way through 2020 and amid the pandemic, past performance and current assets no longer determine whether a business can stay afloat, let alone prove profitable in the years to come! i.e. uncertainty is now high amongst many Buyers.
So how can businesses be fairly valued in a COVID-era?
Many things must be considered when valuing a business in this volatile environment. Past performance, current stock levels and assets, goodwill and all of the past variables must still be assessed. However, is there a current demand for the product/service being provided by the business during this unpredictable time? Does the market even exist at present?
These factors will need to be considered. Remember that a Buyer is purchasing the future earnings of the business and the question is has this particular business been permanently affected or was the 2020 year a “one-off” blip?
Thus for many new deals we are finding that Buyers and their advisors are suggesting the inclusion of an ‘earn-out agreement’ for part of the purchase price, so that the business can prove that the future earnings have not been impeded.
If you are hoping to sell your business in 2020, contact Core Business Brokers on (02) 9413 2977, or email Roy on Roy@corebb.com.au. We’d be happy to discuss your options, the potential for an earn-out agreement and help determine a realistic and achievable sale price for your business.