Despite the recent easing of restrictions in Sydney and Melbourne, business valuations, as a result of the economic impact on business, are likely to remain impacted for some time.
Business valuation is typically recognised as one of the more complex areas of accounting given that the value of a business is difficult to quantify and subject to individual opinion. There are fundamentally two components’ investors must consider when valuing a business, risk and future returns.
An uncertain future
A key element of a business valuation is assessing what the future holds for a business as an investor is buying future returns on investment. The disruption on the business world, created by the pandemic has placed a degree of uncertainty of the future. As we approach the two-year mark since the onset of the pandemic, it has also become increasingly difficult to assess future value based on past trading results, as was the case historically.
Although it has been widely reported that M&A activity in the broader market has been very buoyant in recent months, this may not be indicative for all sectors. Valuations of businesses in the hospitality, tourism and retail industries may prove challenging for some time.
Since the pandemic, three types of business events have occurred:
- Business adaption – those that quickly changed were very successful during this period, despite the industry sector
- Business survival – those that required assistance of the government incentives however are likely to continue operating post pandemic. They may revive their value post-pandemic.
- Business closure – those that closed permanently due to circumstances that may have already existed, but which worsened as a result of the pandemic.
Many success stories have emerged from the pandemic; businesses that were able to identify new opportunities from the change.
A great example of a business that adapted and took advantage of the need for change was Providoor. It has thrived during the pandemic. The business was established by well-known Melbourne Restauranteur Shane Delia. It strategically aligned itself with many of the best restaurants in both Melbourne and Sydney. Meals prepared by top chefs are delivered to the customer’s front door, to then heat, assemble and serve at home. A business like this, if sustainable, is likely to be of significant value in the future.
Businesses in the retail sector are likely to have business valuations impacted. However, many of these businesses have also adopted new revenue streams throughout the pandemic by trading online.
Emerging strategic opportunities
New opportunities have been created for businesses to acquire other businesses in the same sector and gain synergistic value.
Businesses that may have struggled through the pandemic, but ultimately survived it, may become the target of a strategic acquisition by a competitor. If so, that business has strategic value.
The business value and synergistic value need to be understood and considered differently in a business transaction. The buyer won’t pay the whole synergistic value to the vendor; however they may be able to negotiate a portion of it. This adds greater value to the vendor. The buyer who takes the risk, justifiably gains the larger proportion of any synergistic value in the acquisition.
It is imperative that your business is always ready for sale. Continuously working on the business, irrespective of whether or not you’re preparing for a possible sale, ensures sustainable profit from one year to the next is optimal. This is what prospective buyers will be looking for.
Contact your HLB adviser should you require strategic guidance related to the preparation of an acquisition or sale.