Valuation of one-off government subsidies during Covid-19

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October 05, 2021

by a searcher from INSEAD in Hamburg, Deutschland

Dear search community,

I'm currently negotiating the company value for a business that received substantial government subsidies as Covid-relieve measure which boosted EBITDA.
I'm wondering whether this subsidy needs to be adjusted for in the EBITDA-baseline? You could argue that this is clearly non-operational. At the same time, the loss in revenue caused by the lockdowns was also an outside-effect. Any experience or thoughts on how to handle this?

Thanks a lot in advance,
Philipp

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commentor profile
Reply by a professional
from University of Southern California in North Palm Beach, FL, USA
There’s more at play here than the financial adjustments and methods to creatively value and then buy/sell businesses, especially lower middle market companies (my niche). The pandemic has stressed companies in numerous ways, some not so apparent. (Yet) Carefully look for cracks in the foundation of companies.

What’s the status of the employees? How has it changed and will it evolve? What about competitive advantages? The variation, composition and health of customers? What affects the landlord (which can affect the condition of premises and leases)? What about the sources of financing, before, during and after the most profound affect from the pandemic? Suppliers, such as the supply chain, pricing, terms of service, etc.?

How about the kinds of marketability of companies, and the buyers pursuing certain kinds of business, and the terms of their offers?

Keep in mind the business you buy today someday you will want to sell. What will that be like?
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Reply by a searcher
from University of Pennsylvania in Dubai - United Arab Emirates
My comments are intimated by the comments of ^redacted‌ but i want to be more emphatic. Multiples and valuation models are academic exercises. Deals get done when a price is agreed between Buyer and Seller. As a Buyer i focus on what is the value of the business under my control where history is an input to my projections. The question becomes how much of this incremental value i am willing to transfer to the Seller to benefit from the residual. Obviously the lower the consideration the more safety margin exists. That said 100% of zero is exactly that. In terms of the optics of multiples, this is something you need to manage with your investors. ^redacted‌ happy to discuss as a Firm alumn
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