Since March of 2020, clients have asked us about the impact of COVID on the value of their business or real estate. We believe that there is no one-size-fits-all, uniform “COVID discount” nor “COVID premium.” Sectors of the economy have encountered different positive and negative microeconomic impacts from COVID. In fact, sub-sectors of the economy have been impacted differently by COVID. Even within those sectors, the underlying fundamentals of businesses have led to various outcomes. In the hardest hit sectors of the economy, companies with strong fundamentals have been able to weather the storm better than similar companies without strong fundamentals. In sectors where there has been growth opportunities from COVID, companies that have quickly scaled their online, curbside, or delivery sales, have faired better than their competitors who were not as nimble. For example, we appraised a business that saw a 75% increase in annual sales during the global pandemic because they were prepared to serve customers through online sales.
Given this variety in outcomes, the impact of COVID on business and real estate valuations poses a unique challenge to appraisers. It requires forecasting cashflows and determining discount rates when the future of COVID is opaque. It also requires particular attention to detail when analyzing comparable sales. We have noticed a trend among business and real estate owners during this time. For sectors of the economy that have benefited from the COVID impact, business owners are eager to sell. Oftentimes, owners in these sectors want to sell when their cashflow is up, hoping to convince buyers that what may be a short-term uptick in cashflows is a sustainable increase to the bottom line. Alternatively, we have observed many businesses and real estate owners delay sales of their businesses or real estate in the most negatively impacted sectors to avoid a perception problem. So, many of the business and real estate transactions in negatively impacted sectors have been sales where the operator did not have strong fundamentals underlying their business. For example, highly leveraged real estate in badly hit sectors, such as central business district hotels, may have undergone financial distress, causing the owners no option but to sell at a discount to intrinsic value.
Therefore, the sales comparison approach to value presents unique challenges right now—are the sales of like-kind property really comparable to the assets being appraised? Although the real estate may be the same property type, in a similar location, the sale must be analyzed to determine if it was a sale under distress that caused a depression in price beyond the intrinsic value of the asset. Furthermore, sales of real estate or businesses in booming sectors of the economy must be analyzed to determine if the forecasts assumed overly optimistic long-term performance. For example, in the business where we observed a 75% increase in sales, we determined that some of the change in consumer preferences for this brand’s products will be sustainable, although the sales will largely return to pre-COVID levels and growth rates in the future.
In summary, a thorough financial analysis on a case-by-case basis is necessary to determine if a “COVID discount” or “COVID premium” is applicable to a business or real estate. So, be cautionary when receiving a cursory answer to the question—what is the COVID impact on value?