StraightTalk Webinar Series

Business Valuation in a COVID-19 World—Cost of Capital, Growth Rates, and Uncertainties

Jim Hitchner, Managing Member of Valuation Products and Services (VPS), unveiled the first of a series of two-hour webinars that targets business valuation and litigation support professionals seeking an intermediate level program. This is a review of the first webinar titled “Business Valuation in a COVID-19 World—Cost of Capital, Growth Rates, and Uncertainties”. This article summarizes the issues discussed during this first webinar.

[su_pullquote align=”right”]Resources:

Best Practices in Business Valuation—A Practical Approach to Advanced Issues and Applications

[/su_pullquote]

On October 29, 2020, Jim Hitchner, Managing Member of Valuation Products and Services (VPS), unveiled the first of a series of two-hour webinars that targets business valuation and litigation support professionals seeking an intermediate level program. This is a review of the first webinar titled “Business Valuation in a COVID-19 World—Cost of Capital, Growth Rates, and Uncertainties”. This webinar delivered valuable and actionable insight.

If this webinar is a harbinger of things to come, then solo and small firm practitioners with experience will not only come away with insight regarding thought leadership, but also have an opportunity to ask their own questions and get straight answers. In this first webinar, Jim Hitchner dove into the following topics:

• Cost of Capital in the COVID-19 economy
  • What is the risk-free rate? The ranges being used? Critique and basis for the choices of risk-free rate?
  • What is the equity risk premium? How does it compare to the pre-COVID-19 RFP? What are the ranges now being used?
  • What adjustments, if any, are being made to the Company Specific Risk Premium (CSRP)? What is the CSRP range? Is an adjustment to the CSRP and cash flow double counting?
  • What approach has Duff & Phelps taken regarding ERP and the RFR?
  • What approach has Chris Mercer, Founder of Mercer Capital and Jeff Davis, Managing Director of Mercer Capital, taken with regard to the ERP and CSRP?
  • How has the debt component of WACC been impacted by the pandemic? How has WACC been affected? What adjustments are being made to WACC?
  • With the income approach, what approach is most often being used for small businesses with COVID-19?
• What sources of economic data is Jim Hitchner and his team considering when developing growth rates? What considerations if any is being given to forecasts prepared by the Congressional Budget Office?
  • What are valuation practitioners saying about how soon the recovery will occur? Stabilization?
  • What terminal year are practitioners using? 3, 5, or more years?
• In business valuations, how are practitioners adjusting for Paycheck Protection Program (PPP) money?
• To incorporate the incremental risk of COVID-19 in valuations, what is, if any, the preferred approach?
  • What approach does it appear that Duff & Phelps has espoused? Other practitioners?
  • What merit is there to using scenario-based analysis to capture the various outcomes? What role should valuation professionals play in developing such scenarios if management is unable to provide scenarios?
  • How should valuation practitioners adjust a capitalized cash flow method for lower expected short-term growth rates?
  • What public market data is available? Can that public market data be used?
• What was “known or knowable”? What do the business valuation professional standards say?
• Are practitioners inserting a subsequent event paragraph on COVID-19 for their December 31, 2019 valuations?
• Regarding the discounted cash flow method, who is using a probability/scenario analysis? Does this probability/scenario analysis lead to a more accurate result vis-à-vis the base case?
  • What has Damodaran said about the use of probability/scenario analysis?
  • If scenario analysis is used, how are weights accorded?
• How Jim Hitchner is responding to the notion that COVID-19 valuations are less certain and reliable?
  • What issues may arise in litigation if the practitioner states or agrees in a deposition that COVID-19 valuations are less certain or less reliable?

As noted above, Jim Hitchner discussed pressing business valuation issues. Webinar participants were also provided PowerPoints and various illustrations or numerical examples to illustrate the points and issues made. These were valuable, especially for those practitioners that prefer the use of visuals.

In conclusion, this first webinar delivered actionable insight and provided the participants an opportunity to ask questions and learn what others are thinking (through the polling questions). To learn more, visit Valuation Products and Services – Valuation Products and Services.

---

Roberto H Castro, JD, MBA, MST, CVA, is Managing Member of the Law Office of Roberto H Castro, PLLC and Legal Compliance counsel for Equilus Capital Partners, LLC, a closely held REIT. He is also Technical Editor of QuickRead and a member of NACVA’s CUV team.

Mr. Castro can be contacted at (509) 679-3668 or by e-mail to rcastro@rcastrolaw.com.