During these strange times, I have heard people say over and over again, “I don’t even know what day it is.” Over the course of the last three months of working remotely and living within the protocols of social distancing, days and weeks have seemed to blend together. There have been times where every day seems the same, whether it is Monday or Saturday, with nowhere to go and a seemingly infinite number of hours of Netflix to watch.
Although you may not be able to remember the date or even the day of the week, the date has arguably never been more important when considering valuation. Many people can’t remember a time when so much happened in such a short time frame. Years have seemed to taken place in the first half of 2020, and business valuation during COVID-19 could look very different than before or after the pandemic.
When a new valuation project comes in, the first questions the valuator generally must ask are: “What is the purpose of the valuation?” and “What is the valuation date?” The latter has been become increasingly important as its impact on value can been significant. There are a large number of valuations that are completed annually, generally at the end of the calendar year. So, if we think back to December 31, 2019, what did we know about COVID-19 at that point and its impact on the economy and business? It can be argued that COVID-19 would not even make its way into the valuation analysis or report for a valuation as of December 31, 2019.
But what about a valuations in the first part of 2020?
Does a valuation with a January 31, 2020 date look different than a March 31, 2020 valuation? In a typical year, the differences may be minimal. But, 2020 has been anything but typical. A valuator must consider all factors that are deemed to be “known or knowable” as of the valuation date. COVID-19 was declared a global health emergency in January, but was the impact on the global and national economy known at that point? March is often referred to as the peak of the pandemic, but how would the long-term impacts of the virus affect a valuation.
As valuations are forward-looking, assumptions and projections must be used, but how difficult has that become in an increasingly uncertain future no matter what date is selected in 2020? Even if we look at a May 31, 20202 date, is the worst past us? Are we beyond the bottom and continuing on the upward trajectory of reopening? There may be more questions than answers, and valuators will need to make some difficult decisions in how to incorporate the events of the first half of 2020 and how they will impact the future. The date definitely matters, but regardless of the date, valuators need to take great care in discussing the potential impacts of the pandemic and how these factors were included in the analysis to arrive at a conclusion of value.