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Bump or Slump: COVID Impact on Business Value

M&A Selling

Almost all businesses were affected by COVID in 2020. For the most part, businesses fell in one of two camps: the COVID Slump or the COVID Bump. 

Hospitality businesses, including restaurants, predominantly fell into the slump. Gyms may lose customers permanently (or at least for the foreseeable future) as people bought home fitness equipment. For restaurants and stores near big commercial office centers, it could be years before they get back to pre-COVID numbers.

Many other industries saw a definite COVID bump. The pandemic did not affect them negatively, in fact, it gave a substantial boost to their revenue. Lab testing companies who were quick to pivot to COVID testing had sales more than double. Urgent care gained its bump, predominantly from COVID testing and front line care. 

Whether your business was similar to the majority experiencing a COVID slump, or you’re one of the few lucky ones with the COVID bump, you may be wondering how does last year affect your value? 

Good News: We’re seeing that those who had a slump or lost revenue, yet didn’t lose customers, are still salable! This is partly due to the large number of buyers which makes the market strong, even for businesses that took a hit during the pandemic. These businesses are still getting their pre-COVID values…by receiving cash at close for today’s value and then an earnout or some other kind of alternative financing to cover the gap between where the business is today and where it will be in the next year or three. 

Really Good News: Business owners who saw a revenue decline (without experiencing significant customer loss) who wish to exit their business today can still receive full value, even if their company has not returned to their pre-COVID numbers yet. 

Great News: For those businesses that only saw a short, maybe 90-day slump, those businesses are not only saleable, but they may achieve a higher multiple because they showed they are somewhat recession/pandemic proof. 

Glass Half Full News: For companies that had a COVID bump, valuations can be tricky. When valuing a business, we recast the financials to reflect standard operations, meaning we “add back” one-time expenses like unusual legal fees or repairs for storm damage. This also means that adjustments need to be made for one-time boost due to COVID. Buyers expect to to see these adjustments as well. Basically, no Buyer will value the business based off 2020 performance. They want to understand what 2021/2022 will be like and why. For example: 

  • For lab businesses, many believe that COVID testing will never go away. The expectation is that there will be some level of ongoing testing, particularly as different strains emerge. The industry probably won’t see numbers like 2020 again, but the expectation is that there should be a consistent bump going forward. 
  • For the urgent care facilities, a sustainable increased revenue is projected due to future testing plus converting those new 2020 customers to long-term patrons.

Takeaway: Buyers continue to provide allowances for a COVID slump, as long as the fundamentals of the business haven’t changed. However, buyers are also sophisticated enough to know that they won’t pay on a one-time COVID bump without solid justification as to how those sales will convert to ongoing business.