Date posted: 25/11/2020

How to adapt CFME in a post COVID world

In his CA ANZ Business Valuation conference talk, Simon Dalgarno FCA explored the impact of COVID-19 on Capitalisation of Future Maintaining Earnings (CFME) and by way of a case study explains how to adjust the valuation calculations.

In brief

  • Simon Dalgarno FCA, CA Business Valuation Specialist, was a key presenter at the 2020 CA ANZ Business Valuation conference, held in October
  • He held a session explaining how to calculate CFME in a COVID-19 world, and the impact of different assumptions about recovery on valuations
  • The key messages from his interactive presentation are summarised in this article, and other content from the conference is available to purchase online

At this year's CA ANZ Business Valuation conference, Simon Dalgarno FCA looked at the implications of COVID-19 for business valuers – especially on adapting Capitalisation of Future Maintaining Earnings (CFME).

A director at Leadenhall, Simon Dalgarno FCA, led a fascinating presentation that unpacked how to determine business value in the time of COVID-19.

The session opened with reference to a LinkedIn meme – a cup emblazoned with EBITDAC – Earnings Before Interest, Tax, Depreciation, Amortisation and Coronavirus. While the meme was a joke, Simon pointed out it raised a valid point for valuers: how do you change, adjust or normalise earnings numbers to consider the impact of COVID-19?

Determining CFME and establishing FME

Dalgarno reviewed the fundamentals of how to determine CFME, then applied these principles to Tasmanian boutique brewing company, Boagus. With no tourism due to COVID-19, Boagus lost all its cellar door sales. Additionally, Victoria's lockdown and border closures meant the company lost its valuable Victorian market.

Attendees broke out into chat areas, led by Katy Lawrence, Fung Yee, Nathan Timosevski and Richard Norris, to workshop how they'd establish FME, and determine what multiple should be applied to the business.

The impact of COVID-19 on valuations will vary significantly based on different assumptions about the return to normality.

Dalgarno then went into a detailed breakdown of the company's income statements before and after COVID-19, proving that capitalisation equals Discounted Cash Flow (DCF) – and that DCF was the most appropriate valuation method. He also discussed the steps involved in converting a CFME to a DCF and analysed the impact of COVID-19 on various cashflow scenarios.

Key insights

Dalgarno highlighted how important is was to consider multiple cashflow scenarios, based on the shape of the expected recovery – and to understand that the impact of COVID-19 on valuations will vary significantly based on different assumptions about the return to normality.

He also said it is critical to avoid broad assumptions about the impact of COVID-19 on a business – for example, the virus has negatively impacted sectors like tourism, but positively impacted health services, food sales and cafes in local areas.

Access Business Valuation conference recordings online

This article highlights the key messages from this practical interactive session.  Due to the interactive nature of the session, we are not able to offer it as a webinar for members who missed the live conference.  However, the lecture-style presentations from the Business Valuation conference are now available online as a recorded webinar, including Aswath Damodaran's keynote address. 

Find out moreFind out more

Wisdom of the Jedi: Professor Aswath Damodaran

Professor Aswath Damodaran was keynote presenter at the 2020 CA ANZ Business Valuation conference.

Search related topics