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COVID-19: Forecasting During Covid-19 without a Crystal Ball

April 30, 2020

Blog 4

COVID-19 Mini Series

In this blog, we discuss the use of estimates, judgement, and forecasts in the context of Covid-19.

This is the fourth blog in Davis Martindale’s “Covid-19 Mini Series”. 

In our previous Covid-19 blogs, we discussed:

  1. the timeline of the build up to the current social distancing measures;
  2. use of hindsight in valuation -whether knowledge of the economic impact of Covid-19 can be incorporated into a value determination; and
  3. potential Covid-19 disclosures, and reporting options that you may see in valuation reports.

In this blog, we discuss the use of estimates, judgement, and forecasts in the context of Covid-19.

We are living through a very challenging and uncertain time. There isn’t any doubt that the Covid-19 crisis has caused health, social, and economic impacts worldwide. This has led to public policy measures being implemented to contain the virus’ spread, which have resulted in significant operational disruptions for many companies. These public policy measures have forced businesses to respond in real time to new information, and advice.

Stock markets are being tested with daily volatility, as businesses of all sizes have been affected. But do the indicators affecting the stock markets, and large public companies, translate to having a similar affect in value for small and medium sized entities?

This depends on many factors. All valuations require the use of both estimates, and judgement. The impact of this pandemic will place increased emphasis on estimates, and judgement used for 2020 valuation dates. While most sectors are negatively impacted, some are thriving. The pandemic will create distinct winners and losers.

Forecasting Future Results Considerations

An important factor to consider when forecasting future economic results, and valuing a business during Covid-19, is how long the disruption is expected to last. While assessing recovery expectations, one may consider the different shapes of economic recovery that are possible during, and after Covid-19:

  • V-shaped recession whereby the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery;
  • U-shaped recession which is longer than a V-shaped recession, and has a less-clearly defined trough;
  • W-shaped recession which is also known as a double dip recovery, is when the economy falls into a recession, recovers with a short period of growth, then a slower period of growth (possibly a recession), before finally recovering; and
  • L-shaped recession or depression occurs when an economy has a severe recession, and does not return to trend line growth for many years.

While it may be too soon to predict what the shape of the economic recovery following Covid-19 will look like, business owners may wish to consider multiple forecasting and planning scenarios, based on the options set out above. Depending on the industry, the use of multiple scenarios could be a useful tool in valuing a business during 2020, and beyond.

Other general factors to consider in valuing a business during Covid-19 include:

  • Which sector and industry does the business operate in?
  • How will the business continue to deliver its products and services during this disruption?
  • How quickly will the business recover when things go back to normal, whatever the new normal may be?
  • How concentrated or diversified is the customer base? How are they impacted?
  • How concentrated or diversified are the business vendors and suppliers, and are they impacted in a way that affects the business?
  • How does technology help, or hinder the delivery of products or services?
  • How will cash and working capital be managed?
  • Does the business hold off on certain capital expenditures, or in some cases accelerate them?
  • Was the business highly levered prior to the crisis? Do they have access to capital?

Economic growth forecasts are at this point uncertain. Economic growth is expected to shrink, which coupled with low oil prices is anticipated to lead to a global recession. While Covid-19’s impacts may not yet be known or quantifiable, it has become quite clear that everyone is impacted in one way or another. Many businesses are shutting down, deferring transactions, deferring capital spending, and having to revise their business models.[1]

But what does this mean to valuations specifically? In our next blog, we will explore Covid-19’s impact on valuation approaches and risk rates.

If you would like a further discussion on any of the topics covered in our mini series, please do not hesitate to call our team


Louise Poole - Valuation & Litigation Partner - Davis Martindale
Louise Poole

Valuation & Litigation

Korab Ferati - Valuation Manager - Davis Martindale
Korab Ferati


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