COVID -19: yet more things for businesses to think about with regards to future business / share valuations; another acronym to understand EBITDAC

26 January 2021



As well as the severe implications for people’s health, COVID-19 continues to significantly impact some businesses. Businesses have had to rethink and reconfigure the way they operate. For many, focus areas have been workforce, operations and supply chain, finance and liquidity and future strategy. The changes to businesses and impact of COVID-19 over the last 12 months and going forward will now require additional consideration when valuing businesses. A generally accepted valuation methodology for typical trading businesses is a multiple of maintainable EBITDA (earnings before interest, tax, depreciation and amortisation) after adjustments for one-off costs and in some cases income. This is often referred to as the enterprise value.  Net cash/debt and working capital adjustments are then applied to provide the valuation of the business. The adjusted maintainable EBITDA reflects the underlying profitability of the business, therefore it is in the interest of the shareholders to ensure the EBITDA is as high as possible. We often analyse EBITDA over a three year period and calculate a weighted average.  Profitability reflected in recent financial statements for many businesses may look very different to the ‘norm’. COVID-19 adjustments Many businesses have and continue to incur additional costs directly related to COVID-19, these include:

  • Loss of deferred income relating to delayed projects;
  • Increased shipping / raw material costs;
  • Increased expenditure on personal protection equipment and cleaning costs;
  • Re-configuration expenditure incurred to ensure a safe working environment;
  • Computer related costs to facilitate home working;
  • Increased vehicle costs to enable staff to travel separately; and
  • Additional professional fees in relation to legal fees (review of contracts, redundancy etc) and accountancy fees to process furlough arrangements.

Quite often when we are valuing companies, shareholders comment that identifying historical one-off expenses will take some time and analysis and might mean involving staff from the finance department without necessarily wanting them involved in such work, as a result of such adjustments not being easily identifiable. Another acronym, EBITDAC may well become part of our terminology in the future - earnings before interest, tax, depreciation, amortisation and COVID-19. Is now the time to capture COVID-19 adjustments? Good quality management information with the ability to compare financial information reliably over time is extremely helpful during the valuation process and indeed in any corporate transaction such as a disposal or a management buy-out. Capturing COVID-19 costs now will be time well spent because in the future COVID-19 could form a significant adjustment when assessing the underlying profitability of the business. If you would like to chat through any of these points or discuss any potential corporate finance areas such as selling, buying or instructing a business valuation, please do not hesitate to get in touch with Tanya, our corporate finance partner.