For more than a year now, the COVID-19 virus has been dominating us and has caused many companies, but also web projects, to slide into a crisis.
Uncertainty, constant change and course corrections characterize society. Depending on the industry, the crisis has a stronger or weaker impact, and a global economic crisis cannot be ruled out. From existential fears to downright booms, everything is present in the various industries.
Even after more than twelve months, it is still difficult to assess the exact consequences, which is why planning calculations or assumptions that have to be made for a company valuation are a particular challenge. This is because the value of a company is based on forecasts of future cash flows and is therefore difficult to estimate according to the current economic situation.
This article attempts to take a closer look at this influence of COVID-19 on company valuations. At the very end of the article, we also derive how this may affect web projects.
COVID-19 impact on business valuation
COVID-19 has not only constantly changed policies and frameworks, but also people’s behaviors. This is reflected in production and supply chains and also affects cash flows and ultimately financial ratios of companies. Since it seems almost impossible for companies to plan with certainty due to constantly changing forecasts, which can be outdated again in a short time, this also results in difficulties for the company valuator when it comes to pricing.
Uncertainty makes pricing difficult
If we draw a comparison with other crises, it can be predicted for the COVID-19 pandemic that the consequences of this crisis are also very likely to weaken. In the short term, however, the pandemic can of course have a significant impact on a company’s development and pricing, depending on the industry and business model.
It is therefore essential that when valuing a company “in COVID-19 times”, it is checked in advance to what extent and at what point in time the company in question is affected by the consequences of the pandemic and should subsequently be classified as a crisis company or not. For the evaluator, it is important that the recognizability of the effects of the coronavirus at the respective cut-off date is assessed on a case-by-case basis. In particular, the specific business model, the area of impact and the location of the business to be valued must be taken into account. According to the Institute of Public Auditors in Germany (IDW), the value of the company is then primarily based on the adjustment of future cash flows.
Future cash flows and potentials are decisive
There are several scenarios for estimating future cash flows. In the context of business valuation, central risk factors are mostly in the numerator, i.e. revenue planning, and in the denominator, i.e. the capitalization factor.
Revenue is the sum of services rendered (within a certain period of time), i.e., the money earned without deducting costs. The capitalization factor depends on the current interest rate. In the case of fixed-interest investments such as a house, capitalization is comparatively easy to carry out, whereas in the case of companies it is often difficult to predict.
Scenarios for the company valuation of cash flows
In this context, the valuer is advised to consider several scenarios when developing budgeted figures. In the best case, the three most likely scenarios should be identified, which according to IDW are :
- “of an immediate recovery (V-shaped course)”,
- “a delayed recovery (U-shaped course)” or
- “a long-term negative development (L-shaped development)”.
If we now look at the course and advanced stage of the COVID-19 pandemic, taking into account the available vaccines, a “U-shaped course” currently appears to be the most likely scenario in comparison. However, it is extremely important here to look at the consequences of the crisis individually, depending on the business, industry, markets or business model. In the retail sector, for example, the crisis may also have long-term consequences because a fundamental change in consumer behavior is emerging, which is why in this case the effects must be analyzed and planned on a case-by-case basis.
Uncertainty especially for small companies and web projects
Even for small and medium-sized companies, a price determination of the company becomes indispensable in this time of crisis, especially if a company succession is possibly pending or even a planned sale of the company is to take place.
Normally, small and medium-sized companies do not carry out standardized corporate planning, but especially in view of the possible changes in the capital market, a valuation is very important. In this context, the valuer has to assess special features and risks on a fundamental level. For example, the dependence on the owner, on a major customer or supplier, but also the interlocking with the private sphere of the owner or a special location risk play a supporting role with regard to the valuation. Such factors must of course be justified appropriately and comprehensibly in the valuation via the planning of cash flows and the shortening of the earnings period.
Uncertainty due to a possible U-turn
Due to the current pandemic situation, there is now an additional challenge that must be taken into account depending on the situation in which the company finds itself. In terms of valuation, the COVID-19 crisis may have a greater or lesser impact on future cash flows and the value of the business. This is then up to the valuer to decide whether to reduce, leave the same or even increase the value of the business due to the looming future cash flows.
In order to be prepared for any eventuality, the company should basically draw up a rough concept for the coming weeks and months in order to be as ready as possible for any development. Keeping an eye on the short-term survival as well as the medium-term development have the highest priority.
Conclusion and impact on web projects
Overall, the effects associated with COVID-19 generally create a great deal of uncertainty when evaluating the future development of a business.
Web projects, i.e., one-person online business companies, can also be hit hard by the crisis in some cases. However, this only applies to web projects to a limited extent, because while COVID-19 effects are felt here, they are not as strong as in other business sectors. Web projects can conduct business online as usual and are affected by delivery bottlenecks at most.
Whereas payment flows were previously hardly foreseeable and were often difficult to plan, COVID-19 has noticeably less of an impact. Above all, it can be assumed that Internet sales will increase, and with them web projects.
Finally, it can be emphasized that web projects are of course affected by COVID-19 but the uncertainty has not noticeably become less or more, it can even be said that an investment in an online business in times of crisis even makes sense. At Projektify, we have even noticed an increase in prices for web projects since COVID-19.
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