While as individuals COVID-19 has challenged many of us physically, mentally, financially and spiritually, for business owners the challenge of merely staying in business continues to be an ongoing battle. The impact on the travel and hospitality industries has been particularly devastating, and the overwhelming majority of businesses have had to evolve at least to some extent to continue trading. So what does this mean when it comes to the value of a business in this economy? How has the impact of COVID-19 affected business values in New Zealand?
Redefining Business Value
To a certain extent, traditional business value drivers have evolved to those more relevant to operating successfully during (and beyond) the pandemic.
Long term survival strategies are more important to business value than ever before. Those businesses who have continued to operate successfully during 2020 and position themselves for a prosperous long term future will add substantial value to their business. For some this may involve developing multiple survival scenarios and forecasts to ensure as many contingencies as possible are in place.
Many of our clients have innovated aspects of their organisation to pursue online and digitisation strategies. They have also implemented permanent improvements such as diversifying their supply base. This is all positive for the value of the business.
Staff retention is also an increasingly important value factor. Those businesses who are able to retain their staff not just by using government assistance packages but because they have adapted and diversified their operations are clearly demonstrating they can “roll with the punches”.
Forecasting And Cash Flow Management
Historically business valuations have used Statutory Accounts as a starting point, and although this is still the case, COVID-19 is causing a shift in emphasis. Management accounts and financial forecasts which show how a business has coped in 2020 and how it is anticipating the future will play a greater role in valuations.
Although many small businesses do not use forecasts, they are an important financial tool. Updated financial forecasts – reviewed regularly – are now essential for establishing the business as a going concern. For example, a positive forecast is more relevant in a business valuation than a temporary drop in revenue.
We have always emphasized the importance of good cash flow management, and healthy cash flow contributes to overall business value. With lockdowns, the restrictions of different Alert Levels and the COVID-19 recession, cash flow management has become paramount. Poor cash flow management is not only a threat to day-to-day operations but it highlights weaknesses that devalue the business. Business owners and managers who have used the crisis to their advantage by focusing on improving their cash flow management and forecasting are both strengthening their financial management and positively affecting the value of their business.
UHY Haines Norton Director and Business Valuer Kerry Tizard works with business buyers and sellers across all industries. To find out more about the affect of COVID-19 on your business value, please contact Kerry on (09) 839-0300 or email email@example.com.