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The Income Approach in a Post-COVID-19 World

By Brandon Nowling, CPA, CVA, Senior Accountant

COVID-19 has created much uncertainty for business owners who are considering buying or selling a business during these troubling economic times. Many owners who are considering selling are asking themselves, “What will the lasting impact be on my business? Will the decline in revenue during 2020 impact my overall business value? Should I wait to sell until my business has stabilized back to pre-COVID-19 levels?”

What is the Income Approach?

The business valuator toolkit is supplied with many ways to value a business, depending on the circumstance, nature of the business, and the owner’s intentions behind the transaction. One of the more widely used methods to value a business is the income approach, as it captures the value of cash flows and operating performance. Within the income approach, the most widely used methods include the capitalization of cash flows method and the discounted cash flows method.

Businesses may not operate in the same way post-COVID-19.

Thus, revenue, overhead, and cash flows are all subject to change. Understanding that the capitalization of cash flows method is best utilized when a company has stabilized financially, the discounted cash flows method then becomes the best option as it allows for adjustments to be made that consider potential long-term effects of COVID-19. Whether those effects are positive or negative to the operating performance of the company is up to company management and the valuator to decide, but it must be a consideration.

Important Consideration When Using the Income Approach 

Having a clear understanding of the market has the potential to affect several other variables within the valuation, such as the discount rate, discount for lack of marketability, and company specific risk.

The dental industry, for instance, has seen little to no effect on top-line revenue or bottom-line net income from COVID-19. Most dental practices closed for one to three months during 2020, but that lost revenue was made up for in the latter months due to pent-up demand. Therefore, dental practice valuations have seen little to no impact as the historical and future operating performance of the dental industry is estimated to remain strong.

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Brandon Nowling is a Senior Accountant with Blue & Co., LLC and is a key contributor in providing healthcare practice management services, specifically focusing on business valuations for physician practices, hospitals, and healthcare related entities.

Brandon currently holds the CPA and CVA designation and is a member of the AICPA. He graduated Magna Cum Laude with a Master of Professional Accounting degree from the Andre B. Lacy School of Business at Butler University.

Contact Blue Today

If you’d like to learn more about business valuation in a post-COVID-19 world, reach out to your local Blue & Co. Advisor or a member of the Business Valuation team below.

Brandon Nowling, CPA, CVA, Senior Accountant

Dustin Brown, ASA-MTS, CVA, Manager

Alex Fritz, Director 

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