Impact of COVID-19 on cash flow and business valuation for start-ups and SMEs | Techsauce

Impact of COVID-19 on cash flow and business valuation for start-ups and SMEs

Whilst the COVID-19 situation is unprecedented, experience from past economic disruptions, such as the 2008 financial crisis, provides some insight into what is likely to happen in terms of cash flow. However, the impact is not uniform.

“Maintaining a sustainable cash level and building tangible assets in order to sustain a business during a pandemic is one of the lessons learned from the COVID-19 outbreak” - Prasen Chakraborty, Head of Financial Advisory at Mazars.

How can you protect the cash flow of your business?

1. Tax payment - the biggest and most important cash flow for a business

Tax payments are one of the biggest sources of cash flow for any business. Significant cash flow positive results can be created in a variety of ways. Some of the most well-known are R&D tax credits, VAT planning, payroll or benefits planning, time-to-pay arrangements, quarterly instalment payments, and crediting tax, loss from a fall in asset values. 

2. New risks and risk management - be ready to take mitigating actions

Businesses will be dealing with new areas of risk and risk management, which means that their structures may need to be adapted, debt restructured, investment plans altered, or supply chains modified. All of these issues will naturally have a significant tax impact.

3. Positioning for the future - possible future opportunities due to the situation

In any economic disruption, once immediate steps have been taken to protect the business and to cover risk, there are generally opportunities to prepare or improve the business for the aftermath of the crisis. A fall in share prices will mean stock options or other incentives are ‘underwater’, having lost their incentivizing effect. They can be reset to retain and incentivize key staff at no cash cost, and, in some cases, a tax deduction as well. Supply chains may need to be changed or rebuilt, or there may be opportunities to accelerate business transformations which were already underway. At a personal level, falls in the value of assets may provide an opportunity to pass assets down to the younger generation.

M&A transactions in the COVID-19 situation

COVID-19 has had a serious impact on various economic sectors, including M&A transactions (M&A and private equity). The difficulty in defining the value of a business in a highly uncertain time can lead to the determination of a price being governed by other criteria (such as the need to buy or sell, strategic aspects, or a gain in market share), or may simply lead to decisions concerning investments being delayed or cancelled.

There are several steps to going forward.

1. Generation of cash flow

As in any financial crisis, the impact is going to vary based on the business sector we are talking about, as well as each company’s characteristics: such as the degree of previous indebtedness, geographical diversification, client or supplier dependency, size, and cost flexibility. However, in the current situation, other variables outside of the company structure itself may have a significant effect on crisis recovery, mainly a company’s access to new financing (equity and/or debt) and the effective deployment of policies (tax, labour, etc.) that central banks and governments implement in response to the crisis.

In our opinion, the fundamental variable that determines the ability to generate cash flow and, therefore, for companies to create value, is time. How long can companies and businesses hold out in the current situation? More importantly, what condition will they be in once all of this is over? 

2. Variable growth

Variable growth, in valuation, refers to the expected growth of generated cash flow, to which we referred in the previous section. The higher the expected growth, the higher the expected value.

Data has recently been published regarding the fall in retail consumption in China due to the COVID-19 crisis showing that it dropped by 20% in February, when the last few years showed an annual growth of over 8%, following 20 years of continued growth. This is, without a doubt, alarming data that will inevitably be seen in Europe and other regions as well.

Just as worrying is the halt in investment in China. The saver, the investor that has resources, and the companies themselves prefer to wait until there is greater clarity, and are keeping their funds in reserve or allocating them to assets that have no related risk. What we saw take place in the financial markets is being echoed in the economy, with both individuals and companies.

3. Risk

Lastly, we have variable risk, understood as uncertainty, volatility, or variability expected in the cash flow generated. In valuation, we reflect this concept through the rate of discount or the valuation multiple. The higher the risk, the lower the value or multiple.

In the current situation, industries such as those related to tourism, travel, and oil, tend to be placed in the same basket of high-risk sectors, at least occasionally, and other, more recent ones, such as online sales, remote telecommunication systems, online courses, or well-established ones such as supermarkets or general food industries, have a low risk profile.

Impact of COVID-19 on business valuation

The COVID-19 outbreak is posing challenges to businesses due to uncertainty regarding the duration and extent of the pandemic. Thus, long-term effects remain unknown. However, the pandemic is likely to have an impact on business valuation. There are several factors to be considered in business valuation. 

1. Date of valuation

The value of a business is based on what is known as at the valuation date. Due to the COVID-19 outbreak, circumstances are changing from day to day. Therefore, the situation that exists as at the valuation date should be assessed carefully.

2. Cost of equity

Consideration of whether a “risk-free rate” is indeed risk-free involves assessing whether the rate is default-free. The financial health of a business is one of the critical considerations when building up a discount rate.

3. Double-counting risk

The basis on which cash flow projection of a business are prepared should be matched with the basis on which the corresponding discount rate is determined. Business-related risk factors should be carefully incorporated into cash flow projections and/or the discount rate, ensuring that no double-counting of risks take place.

4. Discount for lack of marketability (DLOM)

Depending on how a DLOM is determined, extreme volatility of the market may signal a higher DLOM. A prolonged volatile market will affect DLOMs. Although there is insufficient empirical data to quantify the increase in DLOMs due to the pandemic, a justifiable approach to considering its impact should be taken when making a business valuation.

5. Governmental support and incentives

Some businesses affected by the pandemic may be eligible for governmental support and incentives. The impact of such governmental support or incentives should be thoroughly assessed and considered in a business valuation.


Mazars is an international, integrated and independent firm, specialising in audit, accountancy, advisory, tax and legal services. Operating in 91 countries and territories, as of 1 January 2020, the firm draws on the expertise of 40,400 professionals – 24,400 in the Mazars integrated partnership and 16,000 via the Mazars North America Alliance – to assist clients of all sizes at every stage in their development. For more information, please visit


Mazars in Thailand is a leading, accounting, audit, tax, legal, and advisory practice comprised of over 250 professionals. The practice has Thai, British, German, Indian, Dutch, Japanese, Australian, and Korean nationals among its senior advisers, which ensures that the company is well placed to function as a bridge between businesses operating in Thailand and related companies overseas. For more information, please visit


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