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The Market Price of Risk: Quantifying a COVID-19 Equity Risk Premium Using High-Yield Bond Pricing

This month’s blog post is an article that we recently published in the industry magazine, Business Valuation Resources (BVR). You can read the introduction below and then download a free PDF of the entire article.

Valuation professionals are faced with a complex problem of providing appraisals of private companies with valuation dates in 2020 while considering the market volatility and economic slowdown caused by the COVID-19 pandemic. As entire sections of the U.S. economy were shut down and millions of people were forced out of work, business owners in the United States have faced significant uncertainties about the future cash flows of their companies.

When providing appraisals of companies in the time period where the impact of the pandemic is known and knowable, valuation professionals are tasked with: (1) deriving a discount rate that reflects the level of risk inherent in the company’s future cash flows; and (2) assess- ing whether the cash flows to be discounted/ capitalized reflect the risk and uncertainty the pandemic caused. For example, if the valuation professional is provided with projected future financial statements from company management that reflect the expected impact of the pandemic on the cash flows, then recent guidance from the AICPA and appraisal organizations is to utilize the inputs to the cost of equity capital that would otherwise normally apply (no specific adjustment). However, if management is unable to provide projected financial statements that accurately reflect the impact of the pandemic, then recent guidance from the AICPA and appraisal organizations is that the valuation professional would need to use a discount rate that reflects the risk factors of the COVID-19 pandemic. In other words, the appraiser would need to increase the discount rate by some amount.

In this article, we will develop a methodology to help valuation professionals quantify the additional risk that could be used for appraisals of private companies where forecasted cash flows that reflect the impact of the COVID-19 pandemic are not available.

pitfalls when selling your business

Avoid These Common Pitfalls When Selling Your Business

Harry and David revolutionized the way things were done in their industry. When they came on the scene, no one had ever seen anything quite like the world they created. In their first year alone, they moved over a million units, received numerous awards, and were number one in their market.

Harry, however, could never seem to get what he was after…which is exactly the way David designed it. No matter how hard he tried to succeed, David made Harry’s life difficult at every turn. It almost seemed like David wanted him to die! In spite of their differences, however, they had a very profitable business relationship for nearly 30 years.

Market Multiples

What You Need to Know About Market Multiples

Knowing your business’s value not only helps alleviate fears of not understanding what’s really going on with your business, but it also helps you determine when it’s time to make changes in your staff, infrastructure, or products. 

An important component of knowing your business’s value is understanding the potential valuation multiple. A valuation multiple is a financial measurement tool that determines a business’s value by multiplying the Company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) by a multiple observed from sales of similar companies. 

Recent Activities

  • Southard Financial facilitated the sale of Memphis' own Cooper Glass Company

    Southard Financial facilitated the sale of Memphis' own Cooper Glass Company
  • David A. Harris and Mark A. Orndorff spoke at the 2019 Annual Fall Conference of the New South Chapter of The ESOP Association

    David A. Harris and Mark A. Orndorff spoke at the 2019 Annual Fall Conference of the New South Chapter of The ESOP Association held in Orlando, Florida on October 16-17. They gave a presentation titled “Can Employees Really Impact Company Value?”

  • Southard Financial facilitated the sale of Memphis' own TOPS Bar-B-Q chain

    Southard Financial facilitated the sale of Memphis' own TOPS Bar-B-Q chain
  • David A. Harris and Matthew L. Jakes spoke at the 2019 Spring Workshop of the New South Chapter of The ESOP Association

    David A. Harris and Matthew L. Jakes spoke at the 2019 Spring Workshop of the New South Chapter of The ESOP Association held in Atlanta, Georgia in February, 2019 on the topic of “Valuation Appraisal Checklist – 10 Things Your ESOP Appraiser Should be Doing”

  • David A. Harris spoke at The Fall ESOP Forum of the NCEO

    David A. Harris spoke at The Fall ESOP Forum of the NCEO (National Center for Employee Ownership) held in Albuquerque, New Mexico in October, 2018 on the topic, “Communicating Valuation: Tools, Tips, and Examples”.

  • Southard Financial negotiated the sale of and was the exclusive financial advisor to Southern Systems, Inc.

    Southard Financial negotiated the sale of and was the exclusive financial advisor to Southern Systems, Inc.
  • David A. Harris spoke at the 2018 Annual Fall Conference of the New South Chapter of The ESOP Association

    David A. Harris spoke at the 2018 Annual Fall Conference of the New South Chapter of The ESOP Association held in Birmingham, Alabama in September, 2018. He led a workshop called “The People’s Roundtable Interactive Workshop – A series of ‘Build to Last’ activities that focus on developing successful communication and team building programs for employee owners of all generations.” Speakers included Dolores Lawrence, Blue Ridge ESOP Associates; Lindsay Baublitz, SCandH Capital; David Harris, Southard Financial LLC

  • Mark A. Orndorff spoke at the ESOP Nuts & Bolts Seminar of the NCEO

    Mark A. Orndorff spoke at the ESOP Nuts and Bolts Seminar of the NCEO (National Center for Employee Ownership) held in Indianapolis, Indiana in August, 2018 on the topic of “What’s Your Company Worth? – ESOP Valuation.”

  • Southard Financial helps Transnetyx expand with growth capital

    Southard Financial helps Transnetyx expand with growth capital
  • Mark A. Orndorff spoke at the American Booksellers Association Winter Institute

    Mark A. Orndorff spoke at the American Booksellers Association Winter Institute 2018 held in Memphis, TN in January, 2018 on the topic of Succession Planning titled “What is Your ‘End Goal’?”

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