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

Written by Southard Financial on June 25, 2020. Posted in Blog

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.

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What You Need To Know: Gift & Estate Taxes And Business Transactions In The Era Of Covid-19

Written by Southard Financial on May 15, 2020. Posted in Blog

By now, most states in the US are open for business to some degree after the COVID-19 lockdowns. Only a handful have yet to reopen their economies. Most are continuing to operate under partial restrictions, but at least many businesses can begin bringing in some sort of revenue.

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Avoid These Common Pitfalls When Selling Your Business

Written by Southard Financial on March 27, 2020. Posted in Blog

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.

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How to Increase Your Company’s Value through Your Employees

Written by Southard Financial on December 19, 2019. Posted in Blog

In our previous post, we began a discussion on the impact your company’s employees can have on the value of your business. Whenever you decide to sell, you’ll want to understand the role your team plays in the final price you get. 

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Simple Ways Employees Impact Your Company’s Value

Written by Southard Financial on December 4, 2019. Posted in Blog

Are you thinking of selling your company to an ESOP? Do you have an existing ESOP and need to explain the benefits to your employees? Or, do you have employees who have some vested interest in the future value of the company? In this post, we will discuss the ways in which your employees can impact the value of your company and ultimately the value of their investment in the company.

Before we talk about employees, let’s do a quick review of the basic components of value.

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