In this special edition of Valuation News we take a look at the Covid 19 crisis and its impact on company valuation. We provide recommendations on how to address the current crisis within the business valuation model and outline implications for impairment testing as well as valuation date considerations.
The spread of Covid-19 has grown to become a global risk, endangering the health and livelihoods of people worldwide. Immediate consequences for our health, the repercussions of personal restrictions and behavioral shifts will have tremendous economic impacts. The extreme economic uncertainty can be seen in the collapse of stock markets worldwide.
(Business) valuations need to critically evaluate short-, mid- and long-term effects of the Covid-19 crisis on the underlying business model and carefully assess adequacy and the extent to which effects will influence business planning. Commonly accepted approaches for this evaluation unfortunately do not exist. Even in pre-crisis times those were applicable only at highly aggregated levels due to the multitude of unique business models. As a result, there is no one-size-fits-all method. However, a thorough understanding of the business model, its value drivers, market and competitive environment is indispensable. Scenario and simulation analyses provide a meaningful tool to help understand how Covid-19 might impact business planning.
The fundamental approach to estimate the cost of capital remains unchanged. Nonetheless, we expect individual parameters to be impacted differently. Parameters derived directly from capital markets might be insufficiently reliable due to the high volatility currently observed in the market. Lessons from past crises of 2008/2009 as well as 2012 might provide valuable insights.
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