22 Mar 2021 Ankit Chadha

4 Essential Recommendations For Company Valuation

Company Valuation | TRC Corporate Consulting

Due to the recent Covid-19 outbreak and subsequent lockdowns, there has been a significant impact on global markets. It has increased volatility and business disruption worldwide. And when it comes to company valuation, concern has been raised about companies' fair value, resulting in the increased regulator and stakeholder scrutiny.

What is Company Valuation? 

The company valuation is an essential part of any business transaction and is required for many reasons. Whether you seek to complete an investment, an initial public offering, or a merger and acquisition, enterprise valuation forms an integral part of the negotiation. Ultimately, it also decides the success of a given transaction.

But considering the current situation, it can be challenging to predict the crisis's economic impact with any degree of certainty. Our motive is to help you ensure that your corporate valuation in so far as is possible; take this economic impact of the crisis into account.

Considerations For Company Valuation 

Although the true impact cannot be completely fathomed at this stage, we have presented our initial thoughts regarding fair enterprise valuation. The following factors should be considered for your company's valuation process:

  1. Factors Impacting Global Business Valuations 

These are the most relevant factors and risks that should be referred to before you opt for company valuation:

  • Volatility in Global Markets 

As per our observation, there has been significant market convulsions and increased volatility over the past couple of months. Such a situation will impact corporate valuations in the form of higher discount rates. Further, these rates will likely rise along with debt margins and betas as investors may become more risk-averse.

  • Uncertainty of Business Specific Cash Flows 

The uncertainty surrounding the true impact has resulted in corresponding difficulties with the company plan forecasting. Generally, the forecast estimates would usually take the impact into account. But without reliable economic forecasts available, you need to look to other company-specific risks to produce a reasonable business forecast. 

  • Financial Risk Factors 

The ongoing economic and operational uncertainties will likely lead to an increase in counterparty risk. There can be numerous companies defaulting on their outstanding obligations. And it will increase the risk of investing through counterparties that either operate in high-risk industries or have low credit ratings.

There is a possibility of a rise in debt covenant breaches, insolvencies, and asset impairments in the short and medium-term.

  1. Consider These Things During Company Valuation 

There are two sets of considerations that should be kept in mind during enterprise valuation:

  • General Considerations 

  • It will be wise to remember that greater uncertainty results in higher risk, which in turn justifies the demand for greater returns. And it, in turn, will result in lower asset values.
  • Before the company/corporate valuation process, consider the short, medium, and long term impacts of the crisis. They can be macro-economic or business-specific. Today's market disruption may be temporary, and the adjustments you make could potentially overstate or understate the impact on your company's valuation.
  • The fair value is based on what is known and knowable at the measurement date. Thus, the assumptions taken into consideration today may no longer be applicable tomorrow. So, you should document all the procedures and rationale and the company valuation methods that you use to perform company/corporate valuation currently.
  • It would help assess companies' going concern status so that company valuations can focus on the short-term cash flows and liquidity needs.
  • Avoid Significant Under/ Over Company Valuations 

  • The monitoring of macro-economic assumptions to ensure relevance to current market conditions is essential.
  • And the addition of any existing regular reporting and impairment analyses produced by your company.
  1. Application of Value Adjustments 

There are two main approaches for enterprise valuation that can be used:

  • Income Approach 

As stated before, fair value is based on what is known and knowable at the measurement date. Thus, we recommend that companies estimate potential performance shortfalls for Quarters 1, 2, and beyond in so far as possible.

  • During corporate valuation, your financial projections and metrics should consider any government incentives and short-term measures applicable.
  • If investors become more risk-averse, adjustments to discount rates in the form of additional risk premiums may become necessary.

Plus, care should be taken to avoid any double-counting of risks; for instance, additional risk premiums are not required for factors that have already been addressed.

  • Market Approach 

  • If you opt for the market approach, the ongoing metrics and earnings should be looked at on a market participant basis. And then, one-off impacts can be excluded using the market value formula.
  • The appropriate multiple should be congruent with the metric to which it is applied. Usually, the percentage change in market capitalization of comparable companies may provide a good proxy for the magnitude of the change expected in the multiple.
  • Also, it may no longer be appropriate to consider the application of recent transaction prices, especially those from the expansion of the pandemic.
  • Other Adjustments

  • Your company and investors may need to reassess liquidity needs. For instance, the likelihood of debt covenant breaches, the impact of the extended reduced cash flow, funding of working capital required.
  • A re-assessment of credit quality and repayment risk needs to be considered for debt investments during company valuation.
  • And most importantly, an emphasis needs to be placed on scenario analysis during your company valuation.
  1. Quantifying Any Applicable Company Valuation Adjustments 

Company valuations are notoriously complex during times of crisis and require deep knowledge of a range of markets, geographies, and industries. By outsourcing company valuation services, you can:

  • Access a pool of experts around the world to find the specific expertise and market knowledge you require. It delivers the most accurate valuation possible during this time.
  • Draw on their experience advising large corporations, private equity houses, and other financial institutions during crises or challenging periods.

At TRC Corporate Consulting, we understand that the company valuation needs have evolved and shifted drastically. Thus, we offer services based on innovation and expertise directed at productivity and profitability rather than scale efficiency. You can contact us for innovative enterprise valuation services.

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