I don’t know of anyone whose business wasn’t affected, at some level, in 2020. Businesses were either on the covid slump or the covid bump.
We have a customer in the food space that caters, in part, to hotels. This customer was able to pivot and introduce some new products that did well in convenience stores, but it wasn’t enough to make up for the hospitality loss.
Some businesses, like gyms, may have lost customers permanently as people brought those experiences in home. For restaurants and stores near big commercial office centers, it could be years before they get back to pre-covid numbers.
On the flip side, there are industries that saw a definite covid bump. Not only did the pandemic not affect them negatively, it gave a substantial boost to their revenue.
We were working with a business in the plastic lumber industry, for example. As people shifted their spending from taking vacations to enhancing their backyards or vacation homes in 2020, this company saw their backlog grow from three weeks to six months.
We talked to a lab testing company. As one of the first in their state able to do covid testing, sales more than doubled. And we talked to an urgent care group with four locations in the southern U.S. They went from $8 million in sales with $1 million EBITDA to $18 million In sales and $8 million EBITDA, mostly from covid testing and front line care.
So whether you were like the majority that had a covid slump, or you’re one of the few lucky ones with a covid bump, the question is how does that affect your value?
What we’re seeing out in the marketplace, for those with a slump or lost revenue who didn’t lose customers, those companies are still salable. The number of buyers out there means the market is still strong, even for businesses that took a hit during the pandemic.
What we’re seeing is that those businesses are still getting pre-covid values. They’re getting cash at close for today’s value and then an earnout or some other kind of alternative financing to cover the gap between where the business is today and where it will be in the next year or three.
That means those businesses who saw a decline (but no significant customer loss) can still get out today and get full value, even if their company isn’t back to pre-covid numbers yet.
For those businesses that only saw a short, maybe 90-day slump, those businesses are not only saleable, but they may achieve a higher multiple because they showed they are somewhat pandemic proof.
For companies that had a covid bump, valuations can be tricky. When valuing a business, we recast the financials to reflect standard operations. That means we “add back” one-time expenses like unusual legal fees or repairs for storm damage.
So now, when buyers see a one-time boost due to covid, they expect to negatively add that back as well. Basically, they aren’t going to value the business based off 2020 performance. They want to show what 2021/2022 will be like.
For the lab business, they believe that covid testing will never go away. We can expect some level of ongoing testing, particularly as different strains emerge. They probably won’t see numbers like 2020 again, but they should have a consistent bump going forward.
For the urgent care facilities, they’re predicting a 20% increase going forward. That includes some testing, but they also believe that some of those new 2020 customers will convert to long-term patrons now that they’ve gotten to know the location and the staff.
The plastic lumber business also expects a boost, thanks to outdoor furniture sales. Perhaps customers bought two tables and a chair this year. In the years that follow, they’ll continue to add more matching pieces as they can afford to expand their sets. They’re also expecting a boost from commercial customers as well, as restaurants continue to extend their patios and outdoor seating.
The takeaway: Buyers have been more empathetic than I expected and will provide allowances for a covid slump, as long as the fundamentals of the business didn’t change. But on the same front, they’re also sophisticated enough to know that they’re not going to pay off a one-time covid bump without some solid justification showing how those sales will convert to ongoing business.