Corporate Valuation and Estate Planning
COVID-19 and the Value of Your Business
An Estate Planning Opportunity Due to Lower Valuations
What do Black Monday, October 19, 1987, and the COVID-19 Crash of March 2020 have in common?
Black Monday was an event of uncertain cause, but the Dow Jones Industrial Average (“DJIA”) dropped 508 points, or 22.6% on that one day in 1987. It was the largest single-day drop in history. In less than two years, however, the massive losses of Black Monday were recovered in the markets.
The COVID-19 Crash is a very recent event of certain cause. In mid-February 2020, the DJIA was flirting with the 30,000 level. Since February 20, 2020, when the Dow was at 29,220, the Index has dropped to 18,591 (close on March 23rd), or a drop of 36.4% – a larger percentage drop than Black Monday. In the days that followed, the Dow rebounded upon news of the fiscal package to combat the economic impact of COVID-19. As we move through uncertain days, it’s difficult to envision a recovery, but we are convinced that our economy and our people will recover.
Black Monday provided a significant opportunity for intrafamily ownership transfers. Why? Because with the substantial drop in public market values, there was an accompanying drop in private company values.
The COVID-19 Crash is severe. The triggering uncertainties are impacting all of us. The values of our client businesses are, at least for a time, lower than they were just a few short weeks ago.
As business owners and other business leaders continue to make hard decisions in real-time against the ever-changing backdrop of the coronavirus pandemic, their legal and tax advisors would do well to consider whether this is an opportune time for ownership transfers. For many businesses, the current economic uncertainty presents a unique, and perhaps fleeting, opportunity for more tax-efficient estate planning.
Wall Street vs. Main Street
Investors value the shares of public companies on a (nearly) continuous basis. It should not be too surprising that these “real-time” valuations are subject to a good bit of volatility.
Is the value of your business that volatile? Unlike public companies, private businesses are not subject to continuous public valuation. Reliable valuation data points for businesses exist only when a competent business valuation is prepared or when there is an arm’s-length transaction with a third party. As a result, whatever day-to-day volatility exists in the value of private businesses is not visible. However, just because you can’t see it doesn’t mean it’s not there. Instead, what is often assumed to be limited volatility in the value of a private business is more likely a function of the limited frequency with which value is observed.
The same fundamental factors that influence public stock prices – risk assessments, growth expectations, and cash f low projections – also influence the value of all private businesses.
We say all that to say this: unless you are a grocer or the like, the value of your business is likely lower today than it was two months ago, and maybe a good bit lower.
