Fundamentally when appraising a business in a Covid world, nothing has changed. 

A business should always be judged on its ability to produce income and profit for its owners.  When laying out cash today a buyer needs to consider how much income and profit is going to be generated in the future, and then decide how much they should pay today.     

Generally when appraising a business we will look at the following methodologies and work with one or more.

• Asset based – plant value and stock value.
• Direct Market Data – compares to what other similar businesses have sold for and may be based on a gross revenue multiplier or on a sellers discretionary earnings basis (SDE).
• Basic method – Asset value plus 1 year cash surplus.
• Capitalisation of Earnings – need to be clear which earnings are utilised and then determine the cap rate. This needs to be subjective and objective. Generally the higher the risk the higher the expected return. 

Traditionally relied on methods such as reviewing the financial statements may not be as helpful during this period as they may not paint an accurate picture of the true earning power of the business.  For example, a retailer that has had to close during lockdown periods may report lower sales and profit and that may not be an indication of future profitability.  Whilst a large takeaway able to trade during this period may have experienced increased profitability over the same reporting period.  Consideration also is required to assess the impact of wage subsidies and resurgence payments on financial statements for the business. This may be complicated by the impacts of Covid as they have not been distributed evenly. 

The Covid experience of a cafe in an affluent suburb in St Heliers might be completely different to the experience of a cafe in the Auckland CBD.  Both cafés have experienced an operating environment that they never could have imagined, but in different ways.  Another example could be the car yard that has coined it over the Covid period compared to the car park rental company at Auckland Airport that has found the period challenging.  

This does make it difficult for buyers and sellers alike as it truly is a case of seeing around corners at the moment.  For buyers it is preferable to stick to your knitting.  Staying in areas that you are familiar with and comfortable in, assessing value even if the current picture is unclear.  For example, the pizza franchisee might find it easier to assess other pizza companies than they would a service station.  Another consideration, has the business  suffered a permanent change as a result of Covid? This change, either positive or negative could make the historical financial information less relevant.  

One thing I do believe for sellers is that good businesses still sell.  

And on a final note, Don Sloan an expert business valuer reminds us “It’s important to remember that all value lies in the future benefits available to the owner of the business. While the past financial performance of the business is always of interest it is the anticipated future financial performance of the business which will largely influence its value. As Covid restrictions are progressively eased and international borders reopen in 2022 many business owners will be looking forward to better times in the future and should be cautious about assessing value based solely on any poor results which may have been recorded over the last two years.”

We look forward to the good times ahead.

Jeremy Medlin

Business Broker, Clyth MacLeod Business Sales