The final chapter on the impact of the pandemic on the full-service restaurant sector has yet to be written. In the meantime, thinking continues to evolve on conducting valuations in the current environment. In a new special report, What It’s Worth: Valuing Full-Service Restaurants, BVR covers the fundamentals and unique considerations for restaurant valuation—as well as how to assess the long-term outlook for consumer preferences and financial performance. Based on conversations, webinars, and conference sessions with many valuation experts, here are six pandemic-related issues you should consider.
- Known or knowable. You can only consider factors that were known or knowable as of the valuation date. There has been a great deal of debate about who knew what and when and about the seriousness of the pandemic. The general consensus among valuation experts is that the virus was not known or knowable from an economic perspective in the U.S. until the third week of February 2020, when the markets reacted. Some analysts pinpoint the date as Feb. 24, 2020, which was when the Dow dropped.
- Industry and economic analysis. Before the pandemic, it wasn’t unusual for report users to just skim through the industry and economic section. Not anymore—more attention than ever will be paid to this section. Experts stress that the impacts of the pandemic are very industry-specific and, of course, will be dependent on the economic recovery as a whole. Of course, the restaurant business is very local, so information on the impact of the pandemic on the nearby economy is important. (Learn more about current U.S. economic conditions with Economic Outlook Update, a one-of-a-kind review and forecast of the national economy, in one convenient report.)
- Valuation methods. The market approach is being relied on less during the pandemic, although it still must be considered and included in a valuation analysis. It’s more important than ever to scrutinize your comps, especially from transaction databases. If a deal goes through these days, the target firm may be particularly strong or there are some powerful synergies in the deal.
The asset approach will figure into more valuations as there will be a real question as to whether a full-service restaurant is still a going concern (it may be worth more if liquidated).
As for the income approach, the capitalized cash flow (CCF) method has been all but abandoned for the time being in favor of the discounted cash flow (DCF), and analysts are factoring the impacts more into the benefit streams than in the risk factor. Be aware that you are not limited to a five-year DCF—you can use two years, three years, or whatever time frames you feel are appropriate.
Also, a three-step approach is being used in some cases: Step 1 is to examine whether the subject firm can even survive over a certain time frame; Step 2 is to determine whether the firm can improve and to what extent; and Step 3 is to estimate some level of normalized operations post-pandemic. How this analysis pans out can help determine your discrete periods. What’s more, consider using different risk rates for different discrete time periods.
- Cost of capital. Make sure your estimate of the cost of equity is higher than before the pandemic—a by-the-book estimate will give you a lower figure due to today’s low interest rates. Also, be aware of changing capital structure when doing a cost of capital analysis. Especially during the pandemic, some companies may have added debt to raise cash, but those debt levels will not continue long term.
- Revised valuations. Valuations done before the pandemic are being revised in many contexts. For example, a restaurant valued as of Dec. 31, 2019, for a divorce case that has been delayed in court would almost certainly need to be updated. On the other hand, a valuation done for damages purposes is a different story. In general, courts do not consider post-breach market conditions, so there is reason to believe that COVID-19 will not have an impact on the damage calculations for a breach before the pandemic occurred. But this is an area of law that could change as courts begin to face disputes in the context of a COVID-19 world.
- Know the beast. If you had to survive in a jungle where the “king of the beasts” dwells, you would need to know how the lion stalks its prey and attacks. You could make that same case for understanding the impact of COVID-19 on business value. That is, how the virus originated, how it spreads, protection methods, testing, and so on are important for business survival.
While methodologies and approaches are evolving to address the valuation challenges in this new world, valuation thought leaders urge practitioners to go “back to basics”—that is, step back and look to fundamentals when approaching a valuation. The bottom-line advice being gleaned from veteran valuation thought leaders can be summed up in four points:
- Look to the fundamentals of business valuation. Valuation has not changed!
- Use your own best professional judgment.
- Recognize that things will change as the pandemic evolves, and then act accordingly.
- Reach out to peers. Everyone is in the same boat, so network with your colleagues, read everything you can, and attend conferences and webinars to keep current on the latest thinking.
For more on valuing full-service restaurants, be sure to check out BVR’s special report, What It’s Worth: Valuing Full-Service Restaurants. Interested in learning more about restaurant businesses near you? Access hard-to-find business intelligence on small- and medium-sized businesses with Vertical IQ.