The Importance of Business Valuations in the Post-COVID Era

  • In 2009 there were 17.8 million cruise passengers worldwide; in 2019, there were 29.7 million. In 2020, the amount dropped to 5.8 million.
  • In December 2019, Zoom had around 10 million participants per day; today, it has more than 300 million per day.
  • Even the most adaptable companies could meet difficult times. Kongo Gumi, a Buddhist temple construction company founded in 578, was ranked as the World’s oldest family firm. However, in January 2006, burdened with decreasing demand and $343 million in debt, it became a subsidiary of the Takamatsu Construction Group.

Organizations have tried to adapt to external environmental changes during the last decades.

The COVID-19 pandemic suddenly changed the external business environment.

On March 13, 2020, Cirque du Soleil had to cancel 71 performances around the world as governments tried to stem the spread of the virus. The next day, it had to cancel the six Las Vegas shows. The performances began to return in November 2021. Other companies suddenly stopped receiving income, and they still do not know when they will return to the 2019 sales level. Also, in a few months, unexpected opportunities developed. Lysol, a disinfectant produced by the British company Reckitt Benckiser Group, increased sales by 70%. As mass transit systems shut down and commuting patterns changed, bicycling emerged and surged. As one of the top five bicycle producers in the EU, Poland saw production increase by 33% in May 2020 compared to the previous year. Microsoft Teams (for team working) had 13 million users per day in July 2019 and 75 million in April 2020. Slack also increased the number of customers sharply. Lowe’s Cos. reported the highest quarterly sales growth in decades.

The situation is not new; for example, there were two oil crises in 1973 and 1979. There are successful and unsuccessful companies in the same industry in the same country. There are always markets that are growing and markets that are shrinking. The identity and access management market is gaining traction due to regulatory compliance and security concerns; it was $12 billion U.S. dollars in 2020 and is projected to grow to $35 billion in 2028. Independent U.S. bookstores sold $10.3 billion dollars in 2018, a decrease from almost $17 billion a decade earlier. Another example is computer games. Fifteen years ago, there were about 200 million gamers in the world; today, there are 2,700 million (the industry reports $18 billion in revenue in 2021), double that of the movie industry.

What’s Trending?

The subject continues to be studied. I searched the Purdue University Library in December 2021. In the EBSCO database for e-books, the words “change management” gave 160,256 references published between January 2000 and December 2021. In the same period, “business transformation” gave 138,558 references.

A survey published by McKinsey & Company in December 2021 says:

“The success remains an exception, not the rule. Less than one-third of respondents-all of whom had been part of a transformation in the last five years- say their companies’ transformations have been successful at both improving organizational performance and sustaining those improvements over time.”

The 70% change failure had already been detected by Harvard Professor John P. Kotter and other researchers decades before.

Valuation Considerations

This article suggests that revisiting fair value estimates of tangible and intangible assets (a crucial need in years of high inflation) could help have realistic financial statements. A comprehensive business valuation could indicate if the company is increasing or decreasing its value and link it to the competitiveness assessment. The most common valuation methods are:

  • Discounted cash flow valuation, which relates the value of an asset to the present value of expected future cash flows on that asset;
  • Relative valuation, which estimates the value of an asset by looking at the pricing of ‘comparable’ assets relative to indicators like earnings, cashflows, book value, or sales, and
  • Contingent claim valuation uses option pricing models to measure the value of assets that share option characteristics.

Sometimes the appraisal of physical assets is necessary. The valuation in different countries could require special considerations.

Why Are Some Companies Not Competitive?

Which is the main problem: size, technology, financing, products? Is lack of competitiveness common to Latin American companies or other companies in the world? United Airlines has poor results, and Southwest is expanding in the same Denver Airport. Alitalia, the Pope’s official airline, had no profits in the last 15 years; in 2021, the best assets were transferred to a new company (Italia Transporto Aereo). Sony has struggled with different restructuring processes and seems to be profitable again.

Do Cultural Differences Matter?

Some companies are profitable in certain countries, and others are not. Wal-Mart lost money in Germany and finally sold the stores to Metro AG in 2006. After 18 years they left Japan, where it had bought SEIYU. In 2021 it left Argentina too. Several American fast-food chains were unsuccessful in Argentina including Pizza Hut and Dunkin Donuts. As VRG is a multinational organization, advice on cultural differences and legislation could have been helpful in these cases.

What is the Role of Technology?

In recent years, some authors indicated that successful companies that create high-value-added products are based on new technology and adapt quickly to the new external environment. Typical mentioned examples are Adverum, Amazon, and NetEase Games. The words “digital transformation” have been used to refer to anything from a simple technology installation to the complete overhaul of a company’s business model. Recent surveys indicate that manufacturers see digitization, artificial intelligence, and automation as top drivers of productivity and profitability for the coming years.

Determining Competitive Positioning

There are different methodologies to determine the company’s competitive position. Emphasis is made on the external environment, the strategy, the structure, and specific aspects of the internal environment. Minimum diagnosis contents are:

  • External Environment: Opportunities, Threats, Industry Competition, Competitor Analysis
  • Internal Environment: Resources, Capabilities, Core Competencies, Conflicts
  • Performance Indicator Analysis
  • Sustainability Metrics (i.e., ESG)
  • Competitive Deterioration and Time Needed to Change

A business valuation should be added to these traditional analyses.

The competitive position defines what kind of improvement proposals are needed. Often, there are sharp discrepancies about what to do because there is no consensus in the diagnosis. A change process cannot be initiated without a precise diagnosis. How significant is the patient overweight? Does he/she have a couple of extra pounds, or is the weight 20% over the normal? The recommendation is different if the headache is because the patient has not slept well during the night or they may have a cancerous brain tumor.

Sick, not competitive organizations need a transformation, a turnaround, a radical change, a disruptive change, drastic discontinuous change (i.e., surgery?) Usually have only a few months to make the most relevant changes. Healthy, competitive organizations need continuous incremental change, adaptation, renewal (i.e., a diet plan?) Usually, they have a couple of years to do the fine-tuning.

The competitive assessment helps to determine at least:

  1. If the company value has increased or decreased
  2. How much change is needed (change magnitude and change goals)
  3. How much time is available to make the most relevant changes
  4. The time available to implement critical changes
  5. The availability of resources to execute those changes
  6. The “agility” of the company’s structure to make changes
  7. Which are the main problems to solve
  8. Which are the main restrictions in the change process

After the assessment, some innovation proposals could be evident. Financial restructuring or business combinations through mergers or acquisitions could create new opportunities. Other examples are ideas to adapt to changing consumer behavior, leveraging new or emerging technologies, or different production logistics.

For a deeper conversation on how VRG can assist your organization manage through change via our valuation and advisory service expertise, we welcome to you contact us or reach out to article author, Rodolfo Biasca.