Many entrepreneurs expressed fears Covid-19 would drag the value of their business down and investors approached me to check if their assets would no longer be viewed as an attractive investment. This is a common and fundamental misunderstanding in valuation. In evaluating a business or an investment, I have frequently encountered this confusion, not just during difficult times.
The value of a business or an investment is usually not, and should not be, based solely on a single performance or event. This includes unforeseen troubles like Covid-19. Even without such an event, if a business is having a bad year it does not automatically reduce the value of that business. If it is an unpredictable or special event, it is often treated as an anomaly. A true and fair appraiser would normally take this one-time item out. He or she would still carefully study the underlying causes and verify if the event is based on structural issues. This is a generally accepted practice and it applies to both good times and bad.
Here is a simple example to make it easy to understand. If a business has one particularly bad year out of many good years, that bad year would be carefully reviewed and the whole business’s valuation would be adjusted and the value of that business would normally be increased. Vice versa, if a business has one significantly good year out of several bad years, that good year would usually be eliminated out of the equation for adjustment and the value of that business would normally be reduced. A single year’s performance or a single event, whether it is good or bad, is usually insignificant to the whole picture. The whole picture consists of many other factors including business vision, industry attractiveness, future predictions, products, financial performance, management team, systems and process etc.
What is important, especially for investors, is the business’s ability to prepare for, mitigate, and overcome both foreseen and unforeseen problems. This ability is often graded as a final significant factor in determining the foundation and intrinsic value of a business. If company has a strong ability to change and adapt, difficult times can be more of a friend than an enemy.
In our practice, we have a special tool called a Readiness Assessment (or typically referred to as a General Diagnose) in which it assesses the health and wellness of a business by showing a helicopter view of 20 of the most important factors that should always be clearly visible to its owners and top executives in order to understand the business and to keep track of its value. Sustainable growth is at the core of these 20 factors as it harnesses all things to produce what truly reflects the real picture and value of the business.
Here is another simple example. Most Vietnamese companies are relatively young compared to those in developed nations. They were often founded in hardship and out of necessity. Many have not gone through the test of time, and have not experienced the loss of so much more as a tradeoff for some short-term gains. Therefore, most of them do not have a business continuity plan in place, do not have alternative decision makers, and are not well prepared for fundamental challenges. This makes their business valuation more vulnerable to events like Covid.
So, in difficult times, it is the sustainable growth practices, responsive culture and robust operation that affect the valuation of a business, not the difficult time itself. They are the real competitive advantages that help reduce risks and preserve value for businesses that owners and executives should prioritize.