Business Valuations in a recessionary economy

The rapid spread of the COVID-19 virus and the subsequent lockdown measures caused a hammering of an already weak economy. It is expected that it will take some time for the economy to recover, which will naturally impact on the risk appetite of businesses. But how will this play out in the mergers and acquisitions space and more specifically, what will the impact be on the need for business and equity valuations?

As can be expected, business confidence is low in a recessionary economy. This means that the future returns expected are subdued and as such lower business values should prevail. Is this the case for all sectors? Do lower values drive certain corporate and ownership change activities? What about the regulatory environment?

The prolonged lock-down period forced many (especially office workers) to rely on technology to continue earning an income and indeed for businesses to continue operating. There has been a paradigm shift in businesses acceptance of more advanced technology as part of the business environment and, in the face of further restrictions on and a lower appetite for traveling, this trend should continue and may likely accelerate. Technology business values have increased steadily and can be expected to increase even further in the coming months and years.

This brings opportunities for more acquisitions of smaller and earlier stage technology companies that are well-positioned as 4th industrial revolution players. Furthermore, a consolidation in many sectors are expected as lower business valuations brings opportunities for larger and cash-rich corporates to acquire smaller and struggling competitors and peers.

Lower values also present an opportunity for ownership restructuring, especially for private firms. Typical activities could include the implementation of BB-BEE transactions, employee ownership schemes, succession planning and personal wealth planning. The expectation of lower values may also necessitate the impairment of assets on balance sheets. Such assets may include investments as well as goodwill and other intangibles.

Any sudden change in trading conditions certainly drives business value volatility and with that comes the need to re-assess and do more business valuations. Expect this to be no different now!

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