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Economic Stimulus Legislation and the Valuation of Privately Held Businesses

In response to the substantial economic disruption caused by the COVID-19 pandemic and the associated business shutdowns, the U.S. enacted a series of stimulus measures in late March, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest stimulus bill in U.S. history.  Among other measures, the CARES Act:

  • Provides funding to various federal government agencies (FDA, SBA, etc.) to respond to the COVID-19 pandemic;
  • Provides lending to small businesses under the Paycheck Protection Program (PPP) which provides an opportunity for many small businesses to obtain government funding and loan forgiveness for up to eight weeks of payroll;
  • Requires all employers to provide an additional 14 days of paid sick leave available immediately in the event of any public health emergency, including the current COVID-19 crisis;
  • Reimburses small businesses (defined as businesses with 50 or fewer employees) for the costs of providing the 14 days of additional paid sick leave used by employees during a public health emergency;
  • Provides additional funding for unemployment claims by increasing payment limitations by $600 per week, extending the length of coverage by 13 weeks, and extending coverage to individuals previously not covered;
  • Provides payroll tax credits and deferrals under certain circumstances; and
  • Relaxes NOL utilization rules and interest deduction restrictions, allowing for reduced income tax burdens for companies with recent losses or relatively high levels of interest expense.

By providing direct financial aid to individuals and businesses during the pandemic and associated economic shutdown, the stimulus packages were designed to ease the adverse effects on business cash flows, growth rates, and discount rates.  The extent to which these measures benefit private businesses will vary from industry to industry and company to company. Furthermore, the effectiveness of the response by the U.S. government is also dependent on the length of the shutdown required to slow the spread of COVID-19, all of which is still unknown.

From the perspective of business valuation, the stimulus measures raise a number of questions and issues for business owners and valuation analysts. The following are just a few examples of the complex questions business owners may be faced with:

  • How quickly will the SBA be able to process loans under the PPP, and does the business have sufficient liquidity to continue operations in the meantime? Will the initial funding be adequate to help all those businesses eligible to apply and, if not, to what extent will the PPP’s funding be expanded? The availability of funds and extent of forgiven debt under the PPP will have a significant effect on the value of many small business and, for some companies, may make the difference between survival and liquidation.
  • To what extent will the economic stimulus packages change consumer behavior and business attitudes toward spending during this uncertain time? How will those expectations affect the revenue and financial projections of the affected businesses?  Reasonable and reliable financial projections are often the most important variable in a valuation, and a valuation analyst’s ability to assess and risk adjust management’s projections is often crucial.
  • Can the business take advantage of the potential opportunities to changes in depreciation rules implemented under the CARES Act? The CARES Act expands 100% bonus depreciation to qualified improvement property, which will allow businesses to expense 100% of 15-year qualified investment property in year of investment. This will result in a substantial tax savings and one-time valuation boost for businesses that qualify.
  • Did the business report losses during fiscal 2018 or 2019 (or is it projecting losses in 2020)? If so, can it take advantage of the increased ability to recognize NOLs and reduce income taxes?  A business valuation analyst must be familiar with the changes in this legislation and assess the effect on the subject company.
  • Is the business better positioned to retain or rehire its workforce through or after a period of turmoil as a result of the PPP or improved unemployment benefits? Valuation analysts will need to work closely with management to understand how changes in the subject company’s workforce and cost structure will affect its revenue generating capacity and profitability in the future.

COVID19 and the resulting stimulus legislation has increased the complexity of valuations for practically all businesses.  Over the past 30 years, Gleason has guided its clients through times of extreme volatility and periods of uncertainty and is ready to assist today. Please reach out to one our team members for more information on how we can help and best answer the questions and issues raised by the economic stimulus legislation.