Business Valuation in Times of Crisis: Adjustments, Uncertainty, Scenarios

The valuation of a company is already a complex task under normal circumstances, requiring extensive experience and expertise. In times of crisis, this challenge is amplified—a reality currently faced by many small and medium-sized enterprises (SMEs) in Germany. Whether it’s the war in Ukraine, soaring energy prices, or an increasing shortage of skilled labor: uncertainties and risks for companies have drastically increased in recent times.

Suddenly, forecasts of future earnings and cash flows are burdened with much greater uncertainty. Established valuation methods such as the income approach or the discounted cash flow (DCF) method reach their limits because they rely on the assumption of a stable and somewhat predictable future. But how stable and predictable is the future for a machinery manufacturer whose energy costs have quadrupled within a year? Or for a technology company desperately seeking software developers but finding hardly any suitable candidates due to the skilled labor shortage?

Multiples derived from comparable transactions are also only conditionally meaningful in such times, as market conditions may have fundamentally changed. What is an appropriate EBIT multiple for an automotive supplier when the entire industry is facing a structural upheaval? Even asset values no longer offer a safe haven when assets suddenly lose value or become “stranded assets.” Consider, for example, energy-intensive production facilities that can no longer be operated economically due to high electricity prices or stricter CO2 regulations.

The list of challenges could go on—and all of them have direct impacts on the company’s value and its determination. So how can a sound valuation be achieved in these turbulent times? What adjustments and new ways of thinking are necessary to address the increased complexity and uncertainty? These questions will be explored in this article.

** Before you begin, we recommend reading our article Company Valuation Rule of Thumb: 8 Simple Methods for Quick Business Valuation. There you will find an overview of various valuation methods and their advantages and disadvantages.

Adjustment of Valuation Methods

A first response is: by adjusting valuation methods to the changed circumstances. Let’s take the DCF method as an example. Here, forecasts for future cash flows must be critically reviewed and adapted to the new realities. Whereas in the past steady growth might have been assumed, possible declines in revenue and earnings must now be explicitly modeled. Industry-specific characteristics must be taken into account: a retailer will experience the crisis differently than a software-as-a-service company. Government aid measures such as short-time work benefits, subsidies, or tax deferrals can also significantly influence the cash flow situation and should be included in the considerations.

On the other hand, potential changes on the cost side must be monitored. Do disrupted supply chains lead to higher input prices? Are increased energy costs reflected in margins? Each business model must be analyzed individually here. Exchange rate effects can also play a larger role in times of crisis, especially for export-oriented companies.

Another critical factor is the discount rates used. In crises, risk premiums generally rise, leading to higher capitalization rates (WACC) and, ceteris paribus, reducing the company’s value. But how strongly should this effect be considered? A differentiated approach is necessary here. Not every company is affected by the crisis to the same extent, nor is every industry equally volatile. Capital structure also plays a role: companies with a strong equity base will be valued differently than those with tight liquidity and looming insolvency. All these aspects must be incorporated into the determination of individual, fair discount rates.

Finally, a look at the multiple methods: in times of crisis, even greater attention should be paid to the comparability of the peer group used. Are the reference companies structurally similar and equally affected by the crisis? Comparing apples to oranges leads to distorted results, especially in volatile times. One-off effects such as special write-downs or restructuring expenses can also impair the meaningfulness of multiples. If necessary, the range of comparable multiples should be adjusted to account for the higher uncertainty. In some cases, it may also make sense to temporarily resort to alternative valuation approaches, such as asset-based methods.

In summary: valuation methods must be adjusted and fine-tuned in times of crisis. Blanket assumptions and standard parameters are no longer adequate. Instead, a differentiated, individualized approach is required that considers the specific effects of the crisis on the respective company and its industry. More than ever, sensitivity and experience are needed. Only in this way can a realistic, reliable valuation result be achieved.

Managing Uncertainty

A second key topic in valuation during crises is dealing with uncertainty. Unlike in stable market phases, there is often no reliable “single-point estimate” for the company’s value in times of crisis. The uncertainties are too great, and the possible development paths too diverse. Instead, it is advisable to determine a range of plausible values and run through different scenarios.

This is where scenario analysis comes into play. Alternative future scenarios are defined, for example, ranging from a rapid recovery (best case), a prolonged crisis (base case), to even a fundamental disruption (worst case). For each of these scenarios, cash flows and value drivers are projected differently, and the company’s value is calculated separately. The result is a range of possible company values that reflect the impact of different crisis developments.

Defining the scenarios is anything but trivial. It requires a careful analysis of the industry, business model, and specific crisis drivers. Macroeconomic factors such as the expected duration of the recession, possible catch-up effects, or structural changes in consumer behavior must also be considered. The better the scenarios are aligned with reality, the more meaningful the resulting ranges will be.

Another important method is sensitivity analysis. Here, selected value drivers such as revenue growth, margins, or investment ratios are systematically varied to examine their impact on the company’s value. In a way, a space of possibilities is created to see how the value develops depending on changes in individual parameters. For example, if revenue declines by 20% or even 30% due to the crisis—what does that mean for the company’s value? Or if the EBIT margin drops from 10% to 5%—how sensitively does the valuation respond?

By considering different sensitivities, opportunities and risks can be better assessed and critical thresholds identified. At the same time, it becomes clear which value drivers are particularly relevant in the current situation and how their importance may have shifted compared to a normal situation. These insights can provide valuable guidance on what to focus on during due diligence as well as in operational crisis management. For instance, if customer retention is of paramount importance for preserving value during the crisis, measures to reduce churn should be prioritized.

Scenario and sensitivity analyses are powerful tools to reduce and manage valuation uncertainty. While they do not replace the fundamental work on value drivers and cash flows, they allow for a more structured engagement with the ranges and possible outcomes. In the end, there remains a certain degree of fuzziness that cannot be completely eliminated. But it is a limited, tangible fuzziness that can be calculated and planned for. And that is already very valuable in times of crisis.

Impairment Test Logic

A particularly far-reaching form of scenario consideration is the so-called “impairment test logic.” This examines whether the company is so severely affected by the crisis that the asset value (e.g., expressed as net asset value) falls below the income value. In this case, an extraordinary write-down (impairment) on assets such as goodwill, property, plant and equipment, or investments would be indicated.

The impairment test logic follows the premise that no investor would be willing to pay more for a company than the sum of its parts is worth. If the company value based on income surpluses falls below the asset values, it must be adjusted downward. For valuation, this often means a “two-part” calculation model:

In the first phase, directly affected by the crisis, valuation is based on asset value. This accounts for the fact that earnings prospects are temporarily impaired and do not provide a reliable basis for valuation. For the period after overcoming the crisis, when cash flows have normalized, an income-based valuation model can be used again.

This two-stage approach is undoubtedly complex and involves additional effort. However, it can provide a more realistic picture that better reflects actual value relationships than an undifferentiated continuation of a pure income value calculation. Especially in severe, long-lasting crises accompanied by high uncertainty and a structural upheaval of entire industries, impairment test logic can be an effective means to achieve appropriate valuation results.

A positive side effect: the impairment review forces companies to engage intensively with the value sustainability of their assets. Overcapacities, unprofitable business areas, or non-strategic investments are identified more quickly and can be accordingly cleaned up. In this respect, the impairment logic can also serve as a salutary shock and provide valuable impulses for restructuring or realigning the company.

Conclusion

All in all, it becomes clear: company valuation becomes more difficult in times of crisis but remains possible and meaningful. The key is that calculation methods are adapted, uncertainties are made transparent and actively addressed, and the individual situation of the company is captured as comprehensively as possible. This requires expertise, experience, and a good dose of common sense. Specialized advisors who have weathered many crises can provide valuable support. Precisely because valuations in crises are so challenging, they can serve as an important compass. They help estimate the realistic value of a company—and on this basis, make sound decisions. Whether it is price determination in a transaction, defining credit terms, or setting the further corporate strategy. Because even in a crisis, the rule applies: those who know and correctly price risks can better seize opportunities.