Impact of COVID-19 to Global Business Valuation and Appraisal

On April 8, 2020, the American Society of Appraisers (ASA), CBV Institute, Global Association of Certified Valuators and Analysts (GACVA), National Association of Certified Valuators and Analysts (NACVA), and The Royal Institution of Chartered Surveyors (RICS) collaborated to host a free virtual town hall to discuss how the COVID-19 pandemic will impact business valuation analysts and appraisal titled “Impact of COVID-19 to Global Business Valuation and Appraisal.” This article attempts to unpack the post-COVID-19 guidance discussed during this town hall and provide a synthesized breakdown of the most critical advice provided.

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On April 8, 2020, a global coalition of leading valuation experts representing the American Society of Appraisers (ASA), Chartered Business Valuators Institute (CBV Institute), Global Association of Certified Valuators and Analysts (GACVA), National Association of Certified Valuators and Analysts (NACVA), and the Royal Institution of Chartered Surveyors (RICS), came together in a collaborative effort to host a free 90-minute virtual town hall titled “Impact of COVID-19 to Global Business Valuation and Appraisal.” This virtual town hall was moderated by the CEO/Executive Vice President of the American Society of Appraisers (ASA), Johnnie White, MBA, CAE, CMP. The global panel of experts that participated included:

• Chief Economist, RICS—Simon Rubinsohn
• NACVA—Lari B. Masten, MSA, CPA, ABV, CFF, CPVA, CVA, MAFF, ABAR
• CBV Institute—Stephen Cole, FCPA, FCBV
• ASA—William (Bill) A. Johnston, ASA, Managing Director, Empire Valuation Consultants Group
• GACVA—Jim Walling, CFA, CVA
• RICS—Leigh Miller

During times of conflict or uncertainty, many of us succumb to the very human urge to solve a problem or seek a one-size-fits-all solution, which inherently leads one to erroneously conclude that said solution is infallible, universally applicable, or definitive solution to a or all problem(s). We are in relatively unprecedented times in which no playbook, method, approach, or position is more reliable than fact-based logic and data driven decisions. The town hall effectively presented both the unity and diversity of guidance that exists around the world and across multiple specialties, including: valuation for the purposes of litigation, tax, mergers and acquisitions, venture capital/private equity markets, and financial reporting. This article will attempt to unpack the post-COVID-19 guidance discussed during this town hall and provide a synthesized breakdown of the most critical advice provided.

A Reasonable Degree of Economic Uncertainty—What are the most critical post-COVID-19 risks and uncertainties relevant to business valuation?

Simon Rubinsohn (RICS), explicitly avoided offering points aimed at the quantifying the COVID-19 impact. Instead, he noted the following post-COVID-19 issues apropos to the global economy and business valuation:

• Short-term economic disruption—The coronavirus (COVID-19) pandemic has had a very clear, large, and immediate negative impact on both the domestic and global economy.
• Unprecedented global response—the measures currently being undertaken by governments and central banks around the globe will cushion but not eliminate some of the inherent negative after-effects
• Uncertainty with regard to the Period and Type of Recovery—It is uncertain as to what sort of recovery is likely to take place, as there is a wide range of possible recovery curve trajectories (V-Shape, T-Shape, U-Shape, L-Shape, W-Shape, and variations of each).
• Uncertainty regarding Societal Effects—it is unknown whether businesses and households may exhibit a fair degree of caution once the pandemic is contained especially if there is not a vaccine.
• Long-Term Ramification— may be opportunities, innovation, investment, and technology will inevitably emerge from this disaster, as some companies may flourish while most will not

Subsequently Known or Knowable Events—How do I need account for subsequent events that have occurred after the valuation date?

Lari B. Masten (NACVA), covered standards and subsequent events noting that “if you’re stuck with a specific date and your circumstances dictate that you can’t move off of that date, there’s quite a bit of subsequent event disclosure.” More particularly, when the valuation date (effective date) is in the past, but subsequent events have occurred after the valuation date but prior to the report date, a subsequent event  disclosure may be suggested for business valuation engagements with valuations dates proximate to December 31, 2019.

Valuation Date—At what point did the potential economic fallout related to the COVID-19 epidemic become known or knowable and how does this change my valuation?

William (Bill) A. Johnston (ASA), noted  that “the issue or date range when there was an inflection point will be country specific and people need to adjust that timeline forward or backward based upon where the business is at least doing most of their activity”.

Market Confusion—How much weight can one put into the market reaction when there is very little transactional data and only anecdotal data?

Stephen Cole (CBV Institute), noted that “if you need to undertake a value in the near term at a relatively current date, there may be very little transactional data, only anecdotal data”. He stated that “we must be very cautious in interpreting market data as reflecting willing buyers and willing sellers, as buyers are being very careful, good/strong sellers are not interested in selling today or holding all the good businesses off the market because it’s an inopportune time to go to market”.

Financial Reporting Valuations—How does COVID-19 affect valuations in the context of financial reporting?

Leigh Miller (RICS), brought insight with regards to valuations in the context of financial reporting where clients that are going to subsequently be reviewed by auditors and specialists. He emphasized credibility, disclosure, and documentation as being critical, and noted that “if performing a discounted cash flow (DCF) analysis, one scenario is probably not sufficient”. It was also suggested that multiple forecasts along multiple recovery curve scenarios may be helpful, and to probably weight each one of these scenarios in order to come up with an expected value.

What global factors must be considered when doing a non-U.S. evaluation of a non-U.S. company?

Jim Walling (GACVA), discussed what to consider when you are doing a non-U.S. evaluation of a non-U.S. company. He keyed in on a need to pay attention to where a non-U.S. company is in the COVID-19 cycle. An example, he noted that as of April 8, 2020, India took action much earlier in the cycle when it had roughly 5,000 total cases for the entire country versus over 300,000 in the U.S. Thus, India has roughly a sixth of the daily new cases compared to the U.S., which tells you how much earlier they are in terms of that process.

 Key Take Away Point 1—Disclosure of Subsequent Events

While a subsequent event does not necessarily change the value as of a valuation date, it may infer that the value as of a later valuation date may also be relevant in some cases or situations. In America, the American Institute of Certified Public Accountant’s Statement on Standards for Valuation Services Section 100.43, covers the disclosure of subsequent events if “situations in which a valuation is meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure in a separate section of the report in order to keep users informed.” Put simply, when the valuation date (effective date) is in the past, but subsequent events have occurred after the valuation date but prior to the report date, a subsequent event disclosure would be suggested for business valuation engagements with valuations dates proximate to December 31, 2019 relative to the COVID-19 pandemic.

Key Take Away Point 2—Known and Knowable vs. Relevant

IRS Revenue Ruling 59-60 defines valuation as “Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal.” The date at which something is or was known or knowable will inherently be different for everyone in the world, so drawing a consensus view is no easy task and likely will be country or even case specific. Moreover, cases before a tax court have noted subsequent events that occur within a reasonable time after the valuation date may be appropriate to consider. Therefore, the valuation date required to achieve the objective of the valuation (equitable distribution, taxation, pre-damage event value, or minority owner oppression) may be the bigger or more important question rather than when the COVID-19 after-effects was known or knowable.

Key Take Away Point 3—Market Data vs. Fair Market Value

Business valuations prepared for tax and litigation purposes in the U.S. generally use “fair market value”, which IRS Revenue Ruling 59-60 defines as “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” It is worth noting that if the market reflects buyers and sellers under compulsion, then even the market itself may not reflect fair market value. Regardless of the approach(s) or method(s) used to value a business post COVID-19, it is more important, now than ever, to consider and apply multiple methods, approaches, and forecasted cash flows in order to make logical decisions to arrive at fact-based conclusions.

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C. Zachary Meyers, CPA, CVA, is a licensed Certified Public Accountant (CPA) and Certified Valuation Analyst (CVA) who has been retained in over 1,800 engagements since 2011. Mr. Meyers has provided expert testimony and been qualified in Federal District Courts, Circuit Courts, Family Law Courts, and the West Virginia Human Rights Commission as an expert in Business Valuation, Forensic Accounting, Pension Valuation, and Taxation. Mr. Meyers was elected by NACVA membership to the first National Association of Certified Valuators and Analysts (NACVA) Standards Board in 2016, appointed Vice-Chair in 2017, and Chair in 2018 and 2019.

Mr. Meyers can be contacted at: (304) 690-2619 or by e-mail to: czmcpacva@CZMeyers.com.