July 3, 2020

Covid-19: a new landscape for business valuations

EBITDAC

EBITDAC (earnings before interest, tax, depreciation, amortisation and coronavirus) is a new measure of performance that's had a relatively mixed reception in the market. It relies on applying an adjustment for the impact of Covid-19 to EBITDA, which is a well established principle used in business valuations.

The key challenge is that the impact of Covid-19 is often extremely difficult to identify and quantify whilst what we consider to be the 'new normal' continues to change.

Without a consistent basis for any adjustment, comparisons between companies in order to identify valuation multiples based on EBITDAC calculations will also be extremely difficult to carry out.

The net effect is likely to be a significant increase in the 'expectation gap' between buyers and sellers.

Of course different sectors will be affected in different ways. Businesses in robust sectors such as technology & innovation may be less affected by the Covid-19 pandemic and any potential adjustment in asset values therefore more limited.

During the medium to long term, market practice regarding the use of EBITDAC may develop. What is clear, however, is that current uncertainty around business valuation is likely to remain and that, although it is starting to become a feature in transaction structuring, in the short term EBITDAC is unlikely to be a particularly useful measure of business performance or value driver.

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