How 2020 is Impacting Business Valuations

Business Business Information Buy a Business Buying a business For Buyers For Sellers General Business Sell Sell a Business Selling Selling a business Valuation Valuing

Posted by Jennifer Smith on

Let’s talk more about 2020. Wait…stay with me here…I know we’re all sick of talking about the year that shut down the globe, but it’s one of the most often asked questions we receive these days: “How are you handling 2020 when valuing businesses?” So, let’s talk about it!

First, 2020 wasn’t a train wreck for every business. Some businesses that were deemed “essential” or had a superior online/shipping/delivery infrastructure to their competitors had their best year ever. The first question we have to ask when valuing is this: Are the 2020 financials indicative of future performance or was it an anomaly?

If 2020 was relatively “normal” for the business, then we simply adjust out any one-time items like PPP or EIDL loans and proceed with our valuation process. Keep in mind that what happened in the most recent year or two is more relevant to a buyer than what happened several years ago, so not every year impacts a valuation in the same way.

If the pandemic impacted the year in a way that would affect the value (positively or negatively), then we need to handle 2020 differently. This might involve making minor adjustments to the financials, assigning less weight to the year, or discounting it entirely. Now that we’re well into 2021 and have trailing 12-month financials, it becomes easier to use a June 2020 (when some places started opening back up) – May 2021 profit and loss statement as the most recent ‘year’ instead of the 2020 tax return being the most recent. Using these numbers shows how the business is recovering and helps get some weight off 2020 if appropriate.

At the end of the day, valuing a business for the purposes of establishing a likely selling price is both an art and a science. We’re extremely proud that our valuations are accurate +/- 3% when we compare the values we assigned to actual sale prices over the last 10 years. It takes a major finance geek with lots of common sense to pull that off…fortunately, that’s what you get with Murphy Business of Cape.

Whether you’re planning your future, doing estate planning, or thinking about selling, you should always know your value. It’s an inexpensive and relatively painless way to make sure you are making wise business and personal decisions. Contact us to start the confidential process.