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Business valuations impacted but strategic opportunities emerging

James Mitchell
21 October 2021 3 minute readShare
Business valuations impacted but strategic opportunities emerging

Despite an easing of restrictions in Sydney and Melbourne, business valuations are likely to remain severely impacted for some time yet, according to HLB Mann Judd Melbourne managing partner Jeff Long.

Business valuation is generally recognised as one of the more complex areas of accounting, given that the value of a business is difficult to quantify and subject to individual opinion.

However, Mr Long said there are fundamentally two components investors consider — risk and future returns — both of which remain uncertain.

“A key element of business valuation is that you are buying the future and, at the moment, for many businesses the future remains unclear and more difficult to assess based on the past,” he said.

“There’s a higher degree of risk when you don’t know what the future holds and therefore can’t reliably forecast the future return on investments. This, coupled with heightened risk, is concerning for many business owners.”

While merger and acquisitions activity in the broader market has improved in recent months, valuations are likely to remain impacted across some sectors, such as hospitality, tourism and retail.

Mr Long also believes that there were three types of business events that occurred during the pandemic:

  • Businesses that adapted to change and were very successful during this period despite the industry sector.
  • Businesses that survived with the assistance of the government incentives and are likely to continue post-pandemic.
  • Businesses that closed permanently due to circumstances that may have already existed, but which worsened as a result of the pandemic.

Mr Long said: “Three years ago, if you were a profitable hotelier, you would likely have been optimistic that your financial position was looking bright. Now, post-pandemic, hotels are likely to be in a very different position. However, those that survive in time may revive their financial value to that of pre-pandemic levels.

“Tourism is much the same, and while travel agency values are likely to be severely impacted, we don’t know what the future looks like and any ongoing impacts of the pandemic are difficult to pre-empt.”

Retail, according to Mr Long, is likely to have business valuations impacted; however, many of these businesses have adopted new revenue streams throughout the pandemic by trading online.

“Businesses have had to adapt to maintain their earnings, and, for many, it’s been less about valuation and more about staying afloat; they’re in survival mode,” he said.

He said a great example of a business that adapted and took advantage of the need for change and strategic thinking is the Providoor business, established by well-known Melbourne restauranteur Shane Delia. This business strategically aligned with many of the best restaurants in both Melbourne and Sydney, with meals prepared by top chefs, delivered to the front door, to then heat, assemble and serve at home — it has thrived during the pandemic. A business like this, if sustainable, is likely to be of significant value in the future.

Mr Long does, however, believe there are opportunities for businesses within the same sector to acquire another business and gain synergistic value.

“It becomes a more strategic arrangement. Businesses that may have struggled through the pandemic, but ultimately survived it, may become the target of a strategic acquisition by a competitor; therefore, that business has strategic value,” he continued.

“Business value and synergistic value need to be understood and considered differently in a business transaction. The buyer won’t pay the whole synergistic value to the vendor; however, they may be able to negotiate a portion of it, adding greater value to the vendor. The buyer who takes the risk justifiably gains the larger proportion of any synergistic value in the acquisition.”

Mr Long said he advises clients to have their business ready for sale at all times, managing profit and operations, and understanding the business and the trading environment as best as possible.

“Working on a business at all times — irrespective of whether or not you’re preparing for a possible sale — and ensuring sustainable profit from one year to the next is optimal, as that is what prospective buyers will be looking for,” he said.

“It’s like when people want to sell their house; they fix all the little things that didn’t work properly preparing for a sale rather than fixing it to enjoy while living there. Business owners should apply the same strategy.”

Business valuations impacted but strategic opportunities emerging
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James Mitchell

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