Will the Value of Your Tourism Business be Affected by the COVID-19 Crisis?

by Vanessa Lovie 26th of March, 2020

The COVID-19 crisis is having a rapid and unexpected shock to tourism, leisure, events and hospitality businesses, surely the hardest hit industry across Australia. After the long-running and tragic bushfire season, accommodation operators are now in the midst of the worst year in many generations. Without Christmas, New Year and Easter trade and with zero inbound travel, holiday destinations around Australia are in crisis.

Business Owners are asking the question - What is happening to the value of my business?

We spoke with Matt Davidson from Tourism Property Australia to see how the industry is fairing and whether owners of tourism and hospitality businesses have anything to worry about in the long term valuation of the their business. Matt is a Business Broker specialising in Hotels and Motels on the East Coast of Australia. Matt started his hospitality career 24 years ago at the Dunk Island resort in QLD and is now CEO of Tourism Property Australia with a wealth of industry knowledge.

What is the current feeling amongst business owners and how are you handling the crisis?

Matt: We have been checking in with accommodation operators with concern for their welfare, in addition to ensuring they are aware of the government stimulus and financial assistance measures. Our strong advice to accommodation operators is to work with your lenders and particularly landlords. Look for 6 months relief if possible, however remember that any “paused” repayments of rent will be piled back on to be paid at the re-commencement. There will no doubt be a number of months of severe pain, however looking forward we expect an unprecedented level of tourism marketing investment from state and federal governments to assist the industry recover from this crisis." Matt Davidson.

Should I Sell My Business now?

Matt: In periods of great shock and a huge slowdown in trade, business owners often contemplate their fate and selling often becomes a serious consideration. If this is on your mind, please talk to an experienced broker that you trust. Selling is not necessarily the answer, but most importantly, if you do decide to sell, a quality business should not be “flogged off”. We’ve achieved above valuation sales already in 2020 despite the current market and community sentiment. I’ve also seen a number of valuable businesses practically given away by vendors enacting a “fed up” private sale. Please get some qualified advice.

How will my business be valued after the crisis?

Matt: We feel that business valuations will NOT be severely affected and understand that valuers will look for a normalised revenue and profit result, plus focus on a repeatable future profit result. A 3 to 6 month slowdown, however substantial, can be identified as “abnormal”. Of course, valuers and lenders obviously must note and consider the risk of these type of events, but we don’t expect a slashing of real valuations for long-proven businesses.

In addition, in this zero interest / extremely low yield environment, we are confident that buyer interest in business assets will remain strong. Capitalisation rates (yields) should remain low, although lenders will likely adjust borrowing scenarios and loan-to-value ratios (LVR) to adjust their risk. All asset classes are at a cyclical low yield, meaning highest real-time values. Business valuations are relative to other investment opportunities and should continue to hold up.

Is now a good time to buy a business?

As the situation continues to unfold, there are a number of tourism businesses currently for sale that have a strong financial history and are now just entering this period of government forced closures and decline in sales. It is worth speaking with an experienced business broker who can help you navigate the purchase of a business at this time. A number of these businesses were listed well before the COVID-19 outbreak.

Matt: Firstly, there is a difference between being opportunistic and vulturous. Please remember this. Our advice is simply that a fundamentally strong business with a long term focus and sensible operating plan will always be valuable. Our focus is tourism assets, where the underlying property has a strong impact on business value. Buyers should continue to assess existing profit, genuine potential / upside and alternative future use for all or part of the property. Without doubt, many business buyers will be “scared off” by current events, which will present an opportunity for less competition amongst the remaining buyers.

Are there investors still looking for opportunities in the tourism and hospitality sector?

Matt: Notwithstanding the current shock, we are seeing “new money” come into the tourism business sector – investment funds are expanding their focus in the chase for yields. 1% bank interest rates are not attractive to anyone and the current volatility in world stockmarkets also drives new interest in “bricks and mortar” businesses from investors. Who would risk losing their capital to achieve a 3% dividend yield? I’ve spoken to many investors who prefer direct business investment where the link between profit and valuation is far more sensible than the whims of a listed company investment.

We feel there will be continued and heightened buyer interest in acquiring businesses; no major effect on valuation or availability of cheap debt.

With the governments continued stimulus package releases, further support for business owners is expected in the coming days. As Matt said, when this crisis starts to pass we should see some massive pushes in tourism marketing by the state and federal governments which will help hospitality and tourism businesses to re-open and prosper. After potential months in isolation, Australians will be ready to start exploring again!