Covid-19: Impact on business valuation
Covid-19 is posting challenges to Malaysian and regional businesses given ambiguity on the duration and extent of the virus pandemic. The longer-term impacts remain unknown. The virus pandemic is likely having an impact on business valuation. There are several factors to be taken into account in business valuation.
Published Date : March 31, 2020
Date of valuation
Value of business is based on what is known as at a valuation date. The development of virus pandemic changes dramatically day-to-day; and therefore, the events or circumstances that exist as at a valuation date should be carefully assessed.
Cost of equity
Consideration of whether risk-free rate is indeed “risk-free” involves assessment as to whether the rate is default-free. The financial health of a business is one of the critical considerations when building up a discount rate.
Double-counting on risk?
The preparation basis of cash flows projection of a business should be matched with the basis of determining the corresponding discount rate. Business-related risk factors should be carefully incorporated into cash flows projection and/or discount rate, ensuring no double-counting of the risks in business valuation.
Discount for lack of marketability (DLOM)
Depend on how a DLOM is determined, extreme volatility of the market may signal a higher DLOM. A prolonged volatile market will be affecting the DLOMs. Although there is insufficient empirical data to quantify the increased DLOMs due to virus pandemic, its impact should be considered using a defendable approach for business valuation.
Governmental support and incentives
Some businesses affected by the virus pandemic may eligible for governmental support and incentives. The impact of such governmental support or incentives should be thoroughly assessed and considered in a business valuation.