< Back to Thought Leadership

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.

Download the Full Article

About the Author

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 

ARP Rural Application Deadline

PRF Phase 4 & ARP Rural Application Deadline Approaches

We have a short PRF update this week as the ARP Rural application deadline approaches. Reminder: The application portal closes at 11:59 p.m. on Tuesday, October 26. Before you can fill out and submit your application, your organization needs to validate or revalidate your TIN. HRSA says it could take up to 4 days, but […]

Learn More
Phase 4 and ARP Rural Payment Application

Phase 4 and ARP Rural Payment Application

We are two weeks away from the deadline to submit your Phase 4 and ARP Rural Payment Application. These applications are due on October 26. If you haven’t started the process yet, please do so this week. Part of the application involves validating your Tax ID Number (TIN) with the IRS, and HRSA is saying […]

Learn More
Medicaid Managed Care Organizations

Kentucky Medicaid Managed Care Organizations Changes

Pursuant to KRS 205.640 and managed care contracts, Kentucky Medicaid Managed Care Organizations (MCOs) are required to provide a Paid Claims Listings (PCLs) to all in-state hospitals. The department and each Medicaid Managed Care Organization shall supply a Paid Claims Listing (PCL) to each hospital within ninety (90) days of the last day of the […]

Learn More