September 18, 2020

For many businesses, COVID-19’s fallout has resulted in temporary shutdowns, furloughed workers, renegotiation of bank loans, and cloudy, diminished revenue backlogs. Yet despite these obstacles, there’s a real opportunity for family business leaders to take advantage of a reduced company valuation. Under the right circumstances, a lower valuation can actually enhance the ability of a senior generation to leverage lifetime gift tax exclusions or to sell at reduced values to other family members and subsequent generations.

Calculating Business Valuations

The primary factors impacting valuation are far-ranging, but they typically include:

  • Multiyear cash flow projections for the next 5-10 years
  • Debt levels, including the timing and flexibility of timing for loan maturities. Might the current loans be in “special credits” due to non-compliance of debt covenants agreed to six or nine months ago?
  • Industry trends, which in the current pandemic landscape might include long-term work-from-home implications, the shift to online commerce, and government travel restrictions
  • Entrance to the market of new competitors which may affect future growth prospects
  • Management and staff talent levels

By analyzing the above factors, a valuation firm can then crystalize the two critical factors affecting company valuation — risk and growth expectations. Obviously the higher the risk profile and lower the growth expectations, the lower the value.

Next Steps

Now may be the time for many family businesses to reach out to well established local valuation firms and seriously discuss the degree of COVID-19 impacted valuations. The results of these conversations might very well enhance and leverage intrafamily gifting, sale transactions, or other family wealth transfer techniques.

Lastly, the presidential election on November 3rd might also usher in a diminished or reduced ability to transfer family businesses to future generations. The timing of the current pandemic, combined with the upcoming uncertainty regarding the presidential election, makes this an opportune time for a refocus on potential family business transfers to the next generation.

If you have any questions regarding family wealth transfer strategies, contact a Clark Nuber professional.

© Clark Nuber PS, 2020. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.