How do we value a business in the post-COVID era?

This time last year, we wrote an article on valuing a business in the COVID-era. A year on, and in circumstances that more closely resemble a normal that we all recognise, we revisit the topic to see what has changed and is changing for business valuations in today’s world.

An issue that came about this time last year and is still debated is, is the last two years at all relevant to valuations? Instead, is the focus on now, with more emphasis on budgets and forecasts from here forwards? It is our, and the opinion of many valuation experts, that the very definition of a valuation ought to be about the future cash flows of the business, and COVID-19 has highlighted how recent past results can be very irrelevant to future opportunities. Increasingly we’re talking about what is happening today, what is the budget for the next 12 months and what is the direction of travel?

Additionally, conversations are rapidly moving to post-COVID issues, such as the impact of the war on Ukraine, the value of the pound, and whether oil or commodity prices or interest rates are going to rise further. In many ways, business concerns are now moving beyond COVID.

That is not to say that consideration should not be paid still to the performance impacts of COVID; in many instances, the events of the last two years have created significant changes in how certain businesses operated. Therefore, while the performance of 2020 and 2021 may not be repeatable, it may very well have influences over what today has in store.


With that, we take to looking at areas of performance that are central to this debate.

Revenue expectations

This might be still something that is fairly difficult to forecast. However, in our role as valuation experts, we would ask our client to focus on comparisons of pipeline today with a pipeline that would have been expected in the 6 months from 01 March 2020, in spite of COVID. For instance, if a business would normally have the next 6 months of sales in its pipeline, what has it got today? And what does it look like?

The follow up to that is then whether the next 6 months sales are owed to catch up, a bubble from missed sales or the emergence new markets. If it is, can the underlying business meet current demand in a short space of time? Some businesses can because they have the capacity to catch up, whereas other businesses can only do a certain amount of revenue in a month, so the only thing they can do is change the price, not the volume. Some businesses are also severely resource constrained at the moment – whether it be microchips or steel – so this also needs to be considered.

Looking at the individual business and understanding the drivers of that business is vital, but we also need to understand the variables that the business can control compared to those that the market controls. The more variables the business can control, then the higher quality of valuation they are going to end up with.

Cash flows

Cash will remain a very important tool to have, as it allows a business to buy quickly, avoid needing to use credit and that does give you some price advantage on the buy-side. All of that said, there is still a lot of care needed to ensure there is some proper credit control going on.

  • Government support repayments – CBILS or Bounce Back loans were hugely successful in supporting businesses. We are now over a year on from when they were first available, and repayments on the majority of facilities will have started. Many of these businesses, however, will not have used some or all of them, meaning that this cash is sitting in the bank ready to be repaid, or already paid off. Consequently, in these circumstances, adjustments for repayments to cash flow and performance are now largely irrelevant.
  • Credit control – In the first lockdown, businesses focussed on cash and cash collection. Since then, as business has slowly returned to normality, some of those working capital gains from year one have been lost and old ways of debt collection are returning. Understanding the extent to which tighter cash collection can be maintained or not, again, highlights the need to not rely on the past and look to the future – has the business changed or can it change its credit terms? Has it employed or outsourced more credit control resource to support with debtor collection? An efficient cash cycle remains a source of premium attraction in valuations.

Working capital

The normalised working capital calculation in valuations will continue to require careful consideration. The impact of COVID and those periods where businesses were closed, grants were coming in to cover costs, tax deferrals and rent free periods created real skews to the actual working capital both then and now.

An approach we have taken with clients is to separate out the normal adjustments from the COVID ‘special’ adjustments. Taking VAT as an example, we continue to treat the latest quarter’s VAT as a working capital item, but the deferred VAT from 2020/21 that is being repaid will be treated as debt, rather than working capital. We would therefore extract deferred VAT from the working capital calculations and add in to the debt calculations in both the average and the actual comparison.

Justifying a premium

It is incredibly important to look at the underlying business and the story around future performance expectations and assumptions, rather than just looking at a set of black-and-white accounts and assume you can tell what the important factors of the business are.


We aren’t seeing alternative valuation approaches being used, but there are some more interesting metrics appearing. For example, we’ve seen EBITDAC (Earnings before interest, tax, depreciation, amortisation and COVID) being introduced – but there is still a need to properly assess whether any adjustment for COVID is a proper and normal adjustment, and ensure you’re able to reasonably justify it.

We are challenging far more on the adjustments being presented, but also putting ourselves under scrutiny on the adjustments that we propose to make.

  • Multiples – If the transactions within a dataset that is being relied upon for a multiple occurred during the pandemic then it is vital to understand the true underlying earnings within the businesses involved in each transaction. If that’s not obvious from the data available, then it may require looking into the transactions on a case by case basis to identify those that are relevant. Often databases will provide the high level figure that may or may not have scrutinised to ensure all the transaction data input into it is relevant. Relying on these too heavily, or without additional research, can be misleading.
  • Scenario and sensitivity analysis – In theory, we want to be able to put some scenarios and probability analysis through to get an idea of the likely valuation parameters, but if there isn’t a base forecast in place already, then it is difficult. Unfortunately, this is often the case in SME businesses. We are already spending more time with clients this year to encourage them to work on their base case forecasts first. Having such forecasts and sensitivities available is not just helpful for valuations, but ideal management information to plan with. Whilst none of us predicted a pandemic, as we sit today we can look at the impact of varying levels of increased interest rates, temporary excess energy and fuel costs and the inflationary impact on pricing, sales, materials costs and wages.

Predictions for 2022

Both valuation experts and their clients will need to be prepared to explain any COVID adjustments, provide suitable evidence in support, and set out what future pipeline is expected to look like. Businesses should prepare for future performance to be the subject of as much, if not more, scrutiny as any historical data.

With this, we’d expect a higher proportion of M&A deals to have earn outs, and for those earn outs to be higher proportion of overall consideration on the deal.

This article was written by Simon Blake, For any questions regarding this article, you can contact Simon on the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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