How We’re Thinking About Covid-19, The Future, And Business Valuation (Part 1)

What will the next few years hold for businesses?

While we do not have a crystal ball and while we do expect conditions to continue to evolve, we have developed a framework that has helped us approach valuations during this period.

We are viewing economic conditions in three phases: before Covid-19, during Covid-19, and after Covid-19.

BEFORE COVID-19

This characterizes the time up to approximately the end of February where people’s assumption about Covid-19 were such that a large disruption to the economy was not expected. There are two major business assumptions of this period that impact valuation:

1. For established companies, the future was assumed to be approximated by the past and any expected disruption would result in a modest decline in economic activity (at least when compared to the actual disruption caused by Covid-19).
2. Businesses were generally optimized for efficiency rather than resiliency. Inventory levels were kept relatively low on the assumption that additional inventory could be purchased and delivered quickly. This may change in the future as businesses may optimize for resiliency and in anticipation of challenged supply chains.

These assumptions may not be valid for valuations during Covid-19.

During Covid-19

This period began in early March and will continue until social distancing restrictions related to Covid-19 are lifted. While no one knows how long this period will last, BC’s Startup Plan indicates it will last until a vaccine is developed and administered, effective treatments are developed, and/or there is community immunity.

The estimates on vaccine development are 12 to 18 months from May 2020, all going well. Based on this, we assume that the during Covid-19 period will last for 12 to 18 months. This estimate will evolve as more is understood about the virus and its economic impacts.

This period will be characterized by:

• Reduced sales volumes due to safety measures (social distancing) and general economic conditions where the consumer has less disposable income.
• Increased costs due to safety measures (cost of protective equipment and supplies).
• Potentially reduced productivity due to disruptions in the workplace including working from home or shutting offices should an outbreak occur.

From a valuation perspective, we generally treat this period as a one-time adjustment to value otherwise calculated. What does this mean? In general, we calculate the value of the business based on the expected cash flows of the business after Covid-19, then adjust that amount for the cash used or generated during this period.

In the next article, we will discuss what happens after Covid-19 and what we’ve added to our valuation process to address Covid-19.