Trends in Valuations Amid the COVID-19 Pandemic

“Most of my clients say with pretty good certainty they’ll lose money over the next 12-18 months, but they’re much less certain about when they’ll return to profitability—and when they’ll return to pre-pandemic profitability.”

Jim Volkman
Managing Director

The value of real estate has increased nearly 12% over the last three months, but it’s down 18.5% compared with the same period last year, according to figures cited by Volkman. The value of assets like semi-tractors and construction equipment has declined by around 20%.

“Most of my clients say with pretty good certainty they’ll lose money over the next 12-18 months, but they’re much less certain about when they’ll return to profitability—and when they’ll return to pre-pandemic profitability,” he said.

There are different ways appraisers can value companies, and depending on the one used, they can yield different results. It’s helpful to use more than one method to compare and contrast, Volkman said.

Historically, appraisers used the past performance of a proxy company as a reference point, but the pandemic has upended easy-to-find historical comparisons. That’s leading some appraisers to add an additional risk premium to the weighted average cost of capital—calling it the “COVID-19 alpha”—to get a clearer picture of company value.

Volkman said that other external factors impacting valuations could come into play in the coming months. The presidential election outcome, future tax policy and the phase-four stimulus package are some of the things appraisers will build into their projections.

Lori Smith, a partner and chair of the Business Department at law firm White & Williams LLP, focused on rising uncertainty, which makes it harder to close an M&A transaction.

“What happens to those things when you have a seismic event like a pandemic that shut down businesses? You have companies that signed deals that no longer made sense,” she said.

That’s leading to a rash of canceled deals, Smith said. Some have entered litigation, but even in those cases, companies and acquirers have few options. They often find that the only way to go is forward with the transaction—albeit under renegotiated conditions. She expects that will lead to increased flexibility in future deal terms.

Now that they can’t meet in person, deal-makers also face challenges in completing essential M&A functions, including business development and due diligence—and Zoom may not be enough to bridge the gap. Smith expects this might send some PE firms back into their files for unfinished or unrealized deals.

“Those are companies where it might be easier to get a deal done than trying to start a new relationship from scratch,” she said.

Don McDonough, managing director at private equity firm JLL, says prices have remained stable.

Despite rising complexities in the deal process, McDonough said he’s seen little movement in valuations, arguing that PE owners with companies suffering in the wake of the pandemic are extending exit processes and increasing holding periods.

He added that companies going to market today are in industries that have performed well during the pandemic, like health care.

“Strong businesses are still commanding strong valuations,” he said.