I commonly get asked “what is this business worth” – and the answer usually starts with “it depends”. Well, it now depends a wee bit more, given the impact of Covid-19 on business valuations.
A businesses value is driven by numerous factors, but is understandably very dependent on recent financial results. Where those financial results are weaker due to Covid-19 then a purchaser must determine whether the business will revert to average results in the coming months and years, or whether there has been a fundamental shift downwards.
Only a few months ago one could have thought we would see business valuations decreasing given the perception of weak financial performance between April and June 2020 across a number of industries, expected weaker financial performance going forward, and the lack of confidence in the future (particularly with regards to the border and when and how that may reopen).
However, I am seeing the opposite of this – business values are being supported by:
- Not that many good businesses on the market.
- Plenty of buyers – these include people looking to buy a job, those coming back from overseas and people who are changing direction and want more control of their lives by being their own boss.
- Cheap interest rates – the borrowing capacity of someone at four to five percent interest rates is dramatically changed when you start talking about sub 2.5 percent rates for housing debt.
- The realisation that the world did not end after all. Most people I meet are confident about the future. The fear of those early days at the start of Level 4 lockdown seems well past.
Many business brokers I talk to would sell many more businesses if they could find the listings. Interestingly, it seems to be the same for real estate brokers. There seems to be a good correlation to the housing market. Average prices were predicted to drop nine percent due to Covid – but instead appear to be up more than 10 percent.
Now I have no information to say that values of businesses have increased (there is often quite a lag from a deal being signed – then settled – and then again to receiving reports on clear trends). But I certainly have not seen anything to say they have dropped.
The reasons above for the support of business values look likely to continue for the foreseeable future.
I have not heard anyone picking a lift in interest rates anytime soon. Asset values are expected to continue to be strong. No-one is expecting significant changes to the business landscape from the new government.
Of course, my views are an average of what I am seeing and hearing. Many businesses have been significantly impacted by Covid-19 and the uncertainty of when the border will open.
A heated market housing market can mean that less homework is done before purchase. It can be the same for businesses. Do not let FOMO cause you to buy a leaky one.