Recycling 2020 Financials in the Aftermath of a Pandemic
2020 was a challenging year for most businesses across the board. For some businesses, 2020 was nothing short of catastrophic. If you’re considering selling your business, which was directly and significantly impacted by COVID, you may be wondering if the consequences of your 2020 financial results will impact the sale price of your business.
The answer at this juncture is unclear.
After the great recession of 2008 subsided, Sellers who were deeply affected by the recession took an interesting measure when going to market. Rather than incorporating the 2008 financials as historical figures, they simply discarded the 2008 year from the mix of financials altogether. And as time went on, Buyers and Sellers alike appeared comfortable discarding 2008 figures, singling out that year as “an anomaly.” Throwing away a bad year from valuation metrics is a great thing for Sellers, but it’s not always not a generally accepted practice (2008 exception noted). When applying the lessons of 2008 to the ravages of a 2020 pandemic, a Buyer’s willingness to overlook a major drop in ’20 fiscal revenues cannot be counted upon.
When generating a Broker Opinion of Value, the commonly accepted practice is to apply a weighted average of adjusted earnings against a 3-year period of financials. For a business severely impacted by COVID, this common valuation approach positions 2020 financials sandwiched between 2019 and a twelve-month period that incoporates some recovery period in 2021. So what happens if 2020 is simply omitted from the 3 year analysis?
While throwing away 2020 from the valuation metrics makes perfect sense to a Seller recovering from a pandemic year, it may or may not be acceptable to a Buyer. While the 2008 recession dealt a uniform blow to most businesses, 2020 cruelly singled out certain categories of businesses more harshly than others – a restaurant with an outdoor seating area fared better than a restaurant with dine-in service only. And so forth. For this reason, Buyers are unlikely to uniformly accept the notion of throwing away the 2020 calendar year from the valuation metrics, since the downturn was not common across all businesses. While a Buyer may not welcome the removal of 2020 from the analysis, they may allow a Seller to recycle the year.
By “recycle,” we are alluding to the notion that a Seller may prefer to define value with 2020 financials removed from the value chain altogether; however, Sellers must also be ready and willing to consider the Buyer’s perspective where 2020 is thrown back into the analysis picture for comparative reasons. And in this way, the value is derived somewhere in between the two approaches.
For example, a two-year analysis may be preferential to the Seller (where 2020 is omitted). A Buyer may be willing to consider the two-year analysis, but inevitably, they’ll also want to explore a comparative analysis which incorporates the COVID anomaly year.
If you’re selling a COVID-affected business in the aftermath of the pandemic, it’s important to look at anticipated valuation metrics in a manner that both includes and excludes the effect of the 2020 financial year.
Contact your “Business Broker Near Me” today.