Alternate market-based valuation methods amid COVID-19

BVWireIssue #212-2
May 13, 2020

valuation method
cost of capital, coronavirus, COVID-19

When using the market approach in the wake of the coronavirus, the approach may depend on the valuation date and the date the impact of COVID-19 was felt in the market. It’s generally recognized that mid-February was the point when the virus began to impact the capital markets. Therefore, “when the valuation date occurs after mid-February, analysts may wish to consider whether adjustments to the analysis are appropriate,” according to Daniel R. Van Vleet and his colleagues at the Griffing Group, who offer alternative market-based methods to consider for valuation dates occurring after mid-February.

Example: For the guideline M&A method, here is one alternative to consider if the purchase price of the target reflects the impact of COVID-19 (affected purchase price) but the earnings used in the calculation of multiples do not (unaffected earnings):

  1. Calculate the multiples based on the affected purchase price and unaffected earnings of the target. This calculation will provide the affected M&A multiples.
  2. If COVID-19 has affected the earnings of the subject company (affected earnings), adjust the affected earnings to quantify the unaffected earnings of the subject company.
  3. Apply the affected M&A multiples to the unaffected earnings of the subject company to estimate the value of the subject company as affected by COVID-19 (COVID-19 value).

An article in the upcoming June 2020 issue of Business Valuation Update, Alternate Valuation Methods in the Era of COVID-19,” offers optional ways to adjust the guideline M&A method and guideline public company method. It also discusses considerations for the income approach and cost of capital. In addition to Van Vleet, the authors of the article are Joseph W. Thompson, William P. McInerney, and David J. Neuzil.

They also offer this advice: “Analysts may want to revisit some of the valuation distortions that occurred during the Great Recession of 2008. It appears that the initial economic impact of COVID-19 may be at least as severe as the Great Recession. However, it also appears that the duration of the damage period may be shorter. Let’s hope so.”

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