The COVID-19 pandemic has had a rapid, severe, and complex impact on our society and businesses around the world. The final duration and depth of the current economic recession are still unknown, which has brought uncertainty to the entire Mexican and global economy and has depressed the valuation of most industries.
Although each company is affected by the current economic recession differently, it is true, especially the valuation of small and medium-sized companies, which usually lack the capitalization, diversification, and global resources of large listed companies, that have been affected. Tremendous influence. As valuation and transaction advisors to thousands of companies, we have witnessed this with our own eyes. Other factors, such as the inability to repay debt and private equity investors staying away, will also put downward pressure on valuations.
In such an environment, now may be the best time to look for certain estate planning strategies that will provide your loved one with a future financial situation. In other words, it may be the time to implement a wealth transfer strategy to minimize the impact of taxes and protect family members from financial assets, ownership interests of closely held businesses and income, investments, and other assets of real estate holding companies.
The following summarizes how the current economic downturn is affecting business valuation:
Income approach
The revenue method is fundamental to any valuation analysis. Generally, the “discounted cash flow method” is used. Under the income method, the value is determined by the company’s anticipated future financial performance, and the “discount rate” is used to discount and display the estimated value to reflect the return required by investors to compensate for the company’s inherent level of risk.
Market approach
The market approach derives an indication of value based on multiples paid in recent ownership transactions for the companies facing the enterprise, which are evaluated by industry and operation. Guidance valuation multiples can be based on company acquisitions or listed company stock transactions. Guidance valuation multiples of these listed companies and M&A transactions are applied to the target company’s financial information to obtain an indication of value.
Additional valuation considerations.
Another important factor that could potentially result in lower equity values is the increased use of interest-bearing debt, as many businesses have needed to leverage their line of credit or other forms of leverage to meet short-term cash flow needs.
There is reason to believe that the window of opportunity to take advantage of these strategies may be relatively short, but it is expected that a favorable environment of low-interest rates and access to financing, and continued digital transformation and technological disruption will continue to drive the economy and transaction volumes.
