ValuAdder Business Valuation Blog

When a business faces a sharp downturn, it may begin to look like a lot of disconnected parts moving in multiple directions. That’s the sign of the times – a systemic threat such as a natural or man-made crisis can wreak havoc with a business that normally runs like a well built clockwork.

Effect of a downturn on your business value is twofold:

  • Decline in earnings.
  • Increase of business risks.

At the best of times a sharp decline in your company’s earnings does not bode well for the company’s value. You can see this clearly if you use the discounted cash flow valuation method. The earnings go in the numerator. So if your earnings forecast starts looking gloomy, the business value takes a nosedive.

On the other hand, business risk in the form of the discount rate goes into the denominator. The higher the risk, the bigger the number dividing your business earnings. Again, the effect is to reduce your business value.

Best case, worse case valuation scenarios in foggy times

Lack of earnings visibility due to market disruption is yet another sign of rising risk. In this case you should try forecasting several scenarios in an attempt to capture the range of outcomes the company is likely to face going forward. Think in terms of best case and worst case scenarios whenever a single outcome is hard to envision. With luck and foresight, you might be able to bracket the possibilities.

Watch those fixed expenses

When earnings uncertainty is high, one thing remains certain in any business – the bills keep stacking up. So one of the best strategies in a downturn is to critically review all recurring bills, usually from the highest to the lowest.

These fixed expenses are your worst enemy in situations of unpredictable revenue. Think rent, insurance premiums, long-term lease payments, and any other commitment that must be serviced on a regular payment basis. Whenever possible, renegotiating the terms early on is a very good idea. Remember, in business cash is king, in good times and bad. Never run out of it.

Help your customers and retain sales

Your customers may also be struggling, so by lending a helping hand with more affordable payment terms you might keep them as well as safeguard your revenue stream. Doing nothing to help them you run the risk of losing more sales.

Any sales income is better than none in difficult times. Plus your customers will likely repay your kindness with loyalty when better times return. As the saying goes, ‘a friend in need is a friend indeed’. Customers remember.

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