How Is Coronavirus Affecting the Business Valuation Community?

The unpredictable coronavirus is disrupting work plans of valuation and accounting firms and impacting the global market. Conferences are being postponed and offering webcast versions, firms are limiting travel, supervisors are encouraging virtual meetings, and new ways to help prevent the spread of the disease are introduced every day. Here are some recent developments, issues, and advice that everyone should consider, including factors to favor when performing a valuation in this turbulent, uncertain time.

COVID-19 impacts business valuation conferences

As business valuation conference season approaches, the obvious question is how the coronavirus is impacting these events. The first concern is the health and safety of all individuals involved, and all organizations are monitoring the situation very closely, so things may change at any time.

The New York State Society of CPAs Business Valuation/Litigation Services Conference on May 18 in New York City will go on as planned but will be held via telecommunications, the event’s organizers tell BVWire. More details will be forthcoming.

NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Super Conference and training programs for the Certified Valuation Analyst® (CVA®) and Master Analyst in Financial Forensics® (MAFF®) scheduled the week of June 15-20, in Philadelphia, will not be cancelled. “Though our conference is first on deck for the profession from an information and resource perspective, and just over three months away to plan while in the midst of the global COVID-19 pandemic, we still stay the course,” informs Brien K. Jones, NACVA’s chief operations officer and executive vice president. “We are making plans to restructure these events. Attendees will be able to view conference sessions and training programs and earn NASBA compliant CPE.” The conference is being coordinated in affiliation with the Pennsylvania Institute of CPAs (PICPA).

BVR is optimistic that the coronavirus will be contained before the AAML/BVR National Divorce Conference is held in Las Vegas September 10-12. An option to attend online will soon be made available. We know that you need to make choices with confidence, so there is a risk-free cancellation policy with 100% full refunds being issued up until August 10 (a month before the event).

BVR will offer the Houston ASA chapter’s Energy Valuation Conference on May 13 online only and will convert all “in person” tickets to “online” tickets at no extra cost to attendees. What’s more, all early-bird tickets will be honored, so there is no need to hesitate to register for the conference today.

Also, the Houston chapter’s Expert Witness Workshop & Mock Trial has been rescheduled to Thursday, August 27, at the South Texas College of Law in downtown Houston. Immediately following will be the Forensic Expert Witness Association’s National Conference on August 28-29 in the same location, for three total days of CE/CPE/MCLE educational hours and networking.

Thoughts and advice from the professionals

BVR has reached out to members of the Business Valuation Update Editorial Advisory Board to begin to gather their thoughts on the impact of the crisis on valuations. Here are a few observations and pieces of advice we have received so far from experts the world over.

From the U.S.: Gary Trugman, Trugman Valuation (Plantation, Fla.): “Developing cost of capital in troubled times should be nothing new. We saw this in 2008 after the financial crisis and it should be dealt with in a similar fashion. What is critical to remember is that we value businesses based on what is known or knowable at the valuation date and we must consider what the investing public is thinking at the date of the valuation. While many tried to deal with risk-free rates and the ‘flight to safety’ back in 2008, that almost became the new normal. Thought must be given to the fact that the risks associated with the cash flow of the particular business that you are valuing is what the discount rate must be based on. If all you do is a mechanical computation to build up a discount rate, you are most likely going to be wrong. You need to use common sense and think about how the risk of receiving the cash flows is impacted at the date of the valuation.”

Ron Seigneur, managing partner, Seigneur Gustafson LLP (Lakewood, Colo.): “My sense in all of this is the ‘risk-free’ rate is not really risk free and we will see more emphasis on how to get our arms around the unsystematic risk associated with investments as this is where I think the extra risk we now have ahead of us should be captured. All that said, ask me again tomorrow and next week on all of this as it sure seems like we are in that sort of environment just now.”

From the UK: Andrew Strickland, former corporate partner at Scrutton Bland Chartered Accountants (UK), now a consultant to the firm: “In the UK, the short-term risk-free rate was reduced from 0.75% to 0.1% in short order. The impact on the cost of equity must be far more than that movement of 0.65%, and in the opposite direction from that indicated by CAPM. Times like these lead us to challenge the very fundamentals of our training. But challenge and enquiry are always positive attributes, making us into better valuers.”

From Australia: John-Henry Eversgerd, senior managing director of the valuation and litigation consulting practice in the Sydney office of FTI Consulting: “I’m expecting some significant asset impairments in a number of industries, particularly in Australia, since we have some very strict ‘continuous disclosure’ rules. Those rules require public company boards to announce almost immediately any impairments or other factors that would impact the share price significantly. It is a very low bar, which means boards have little choice but to impair.”

From Hong Kong: Edwina Tam, partner at Deloitte in Hong Kong: “For the development of cost of capital, given the market uncertainty, one needs to critically consider the impact of the current market uncertainties on the business operations in developing the forecast. In determining the nature and extent of the impact on the business and valuation assumptions, the following potential issues may need to be considered:

• “Store or facility closures;
• “Loss of customers or customer traffic;
• “The impact on distributors;
• “Supply chain interruptions;
• “Production delays or limitations;
• “The impact on human capital;
• “Regulatory changes; and
• “The risk of loss on significant contracts.

“Implicitly, these uncertainties need to be reflected in the cash flows; however, a risk-appropriate discount rate also needs to be considered. There is no set approach to account for market uncertainties as the impact will be different for different businesses in different regions.”

Conclusion

For the latest news and updates involving coronavirus and the business valuation community, please visit our coronavirus resource page. And, be sure to sign up for the BVWire, our free weekly ezine that offers advice from top leaders in the profession on this and other relevant topics.

For now, we leave you with these words from Andrew Strickland: “We are in a privileged position. We are members of a profession which has developed the techniques to value that which cannot readily be valued: Fractional holdings in private companies are assets for which there is no ready market, yet we are prepared to ascribe values to them using our professional judgement and training within a discipline developed over many years. We all see further by standing on the shoulders of giants. We therefore have the skills to value businesses when the lubrication in the market runs dry.”