One way to analyze a COVID-19-shuttered firm

BVWireIssue #215-2
August 12, 2020

valuation methods & approaches
calculation of value, discounted cash flow (DCF), industry analysis, cash flow projections, COVID-19

If you haven’t already, you will probably get this question from a client: “The pandemic forced my business to shut down. Should I reopen it or not?” Short of doing a full-blown valuation analysis, a faster method can be used that looks to external yardsticks to estimate a break-even point and calculation of value.

Idea in action: One valuation firm did this analysis for the owner of a business in a destination city with a customer base that was almost exclusively tourists. The business was shut down due to the virus, and the owner needed to get an idea of whether he should hang in there and reopen or stay closed for good. Using external data and forecasts for travel to that area, hotel bookings, convention business, and so on, the valuation analysts projected that, if the business reopened, it would break even in five years. At that point, a calculation of value was done using an industry rule-of-thumb percentage of annual sales. The analysis also showed the cash needed to stay afloat before breaking even. Armed with this information, the owner decided to reopen the business.

Of course, this is a very high-level analysis designed to provide management with an objective basis to help make critical decisions in what is an unpredictable environment. The key is to find a set of external data that will allow for this type of analysis.

For more details on this specific engagement, see the article “Reopen or Not? A Method for Analyzing a COVID-19-Shuttered Firm” in the upcoming September issue of Business Valuation Update. The authors are Amanda Sayn and David Shindel, both with the Michigan-based firm ShindelRock. For nonsubscribers, BVR is making issues that contain COVID-19 articles available on a stand-alone basis. Click here to see the issues available. They all contain practical advice on dealing with valuations during the pandemic.

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