How is Covid-19 impacting valuation multiples

In valuing operating businesses, the risk of a business is reflected in the multiple applied to cash flows.  A higher multiple indicates a less risky business, which generates a higher value for the same level of cash flows than a riskier business. 

Selecting the appropriate multiple for a business requires significant professional judgement and a valuator will consider the broader market, the risk of the industry and the specific company risk of the business, amongst other factors. 

We expect that Covid-19 will have the following impacts on the multiple:

1. Purchaser will be more cautious for a period of time which may lead to lower multiples.  This is reflected in the equity risk premiums some firms are applying increasing (see Duff & Phelps update https://www.duffandphelps.com/insights/publications/cost-of-capital/us-equity-risk-premium-increased-march-25-2020). 
2. The multiple for industries seen to be benefitting in the long-term from Covid-19 will increase, while multiples will decrease for those industries negatively affected.  What is important to highlight is that the multiples on an industry level will be most impacted by long-term trends caused or accelerated by Covid-19 rather than the short-term impacts of the virus.  This could include trends such as working from home or habit changes around food consumption, for example.
3. Changes at a business caused by Covid-19 can also impact the multiple.  As examples, a business could lose a strong management team or its position as a market leader as a result of Covid-19.  These changes could lower the multiple a purchaser would be willing to pay.
4. The longer-term impacts of Covid-19 on multiples is not clear at this point.  A multitude of factors will shape multiples in the long term, including the strength of the economic recovery, monetary policy and the longer-term trends impacting different industries.  

While each business valuation is unique, overall multiples, with some exceptions, may be lower for a period of time with future changes being difficult to predict.

Questions to consider

These are some questions you should consider when advising your clients and working with business valuators:

1. When updating a valuation issued before Covid-19 to a valuation date during Covid-19, are changes in the multiple consistent with changes in the market, industry and business?
2. Are there industry trends emerging or evident that would change the risk associated with the industry in which the business operates?  If so, have these been factored into the multiple?
3. Has the business undergone significant changes that would impact the multiple?  This could include the loss of key management or other factors specific to the company.