March 24, 2020

Business Valuation Considerations in the Coronavirus Environment

By Daniel Roche, Business Valuation Services, National Leader

Valuation

To say the stock markets are experiencing extreme volatility as a result of uncertainty related to the COVID–19 pandemic is an understatement. Currently, we are witnessing unprecedented market volatility, with the Dow Jones Industrial average having eight (8) consecutive quadruple point moves (both up and down) as of this writing and the credit markets tightening significantly.

The business valuation professionals at Marcum have been working to address these concerns as they relate to the valuation of your business and, at the same time, find opportunities that potentially lower valuations can provide for our clients.

From a business appraiser’s perspective, if assumptions underlying any of the methodologies employed to determine the value of a business change significantly, then a valuation opinion as of a prior date may no longer be suitable for a current use. Some of the key factors that may be impacted in the COVID-19 environment include: future revenue orders, supplier risks, customer risks, overall market risk factors and market multiples of public guideline companies, etc. To the extent that COVID-19 would materially impact the determination of current fair market value, the guidance would suggest that any prior valuation needs to be updated.

Regarding logistics, the valuation firm would have to incorporate any factors in effect as of a current valuation date. While there is no “right answer” for when that valuation date would be, it would make sense to document the rationale for picking a suitable valuation date, that at least contemplates a new threat (COVID-19) in the business world that was simply not known (for U.S. companies) as of any prior valuation date. Once the appraisal firm has the updated valuation date, it will most likely re-engage with management to understand the current operating risks facing the company, obtain updated financial statements and forecasts, and assemble market, economic and industry data as of the new interim valuation date.

To date thus far in 2020, the stock markets have lost most of the gains of the past four years. Your business valuation professionals at Marcum can help you take advantage of opportunities created by these lower valuations. Some of the issues we have been exploring to utilize the current depressed valuations to help our clients include the following:

From an estate planning perspective:

Do you have a remaining lifetime exclusion available?
How can you use the current depressed valuations to maximize your estate planning?

From a financial reporting perspective:

How can CEOs/CFOs take advantage of lower valuations?
Will we see more goodwill and other asset impairment in the foreseeable future (ASC 350/ASC360)?
Will the issuance of company stock as compensation (ASC 718/IRC 409(a)) increase?
What will be the impact on fair value “marks” for investment companies?
If your company goes through a restructuring, will you need fresh start accounting after you have had a chance to go through the restructuring process?

From a matrimonial perspective:

What is the appropriate statutory valuation date based on the jurisdiction?
Is there a cut-off date or a date of commencement for the action or a valuation date that pre-dates the incredible speed of the COVID-19/economic/market crisis where a settlement/trial has not occurred? If not, can counsel make a claim for relief based on such unprecedented economic uncertainty? How can the financial expert assist counsel in doing so?
If there is a fluid valuation date and the settlement/trial has not yet occurred, what is the impact on business value?
What is the impact on business cash flow and the impact on child support and alimony/maintenance? How can the financial experts assist counsel/parties in accounting for the financial uncertainty?

That being said, it is still way too early to judge the ultimate impact of the coronavirus over the next days/weeks/months. Everyone’s concerns are now focused, appropriately, on the health and safety of our families, friends and business associates.

For some of you, this message may find your business with difficult decisions to make. We urge you to reach out to your business advisory team, including your professionals here at Marcum, to discuss how to best navigate through the current economic environment, and how current business values may impact your long-term personal and corporate planning. Most of all, though, we urge you to be safe in these uncertain times.

For more information about business valuation considerations, please contact Daniel Roche, Business Valuation Services, National Leader, at 212.485.5708 or email Daniel.