Remote Work: Its Impact on Business Valuation

The concept of working from home (WFH) evolved from an experiment to a reality, accelerated by the COVID-19 pandemic. It became a necessity rather than a choice as employees were forced to work from home. Remote work leads to new opportunities as well as difficulties. This new way of working impacts business valuation, and by implication M&A. While adjusting to this new mode of working, M&A transactions are still on the agenda.

Cap Expand Partners advises and assists company owners to make informed M&A decisions. Furthermore, people come to Cap Expand Partners for advice in financing company acquisitions, growth capital, business valuations, and more. We support our clients’ strategic growth ambitions on a global scale.

Remote work – the new normal

The COVID-19 pandemic forced us to pursue new ways of working; WFH became the norm. COVID-19 provided us with the opportunity to design a new workforce model. This model helps retain talent and increases productivity.

Companies have a variety of WFH options, ranging from fully remote to hybrid models. Many companies have employees work three days in the office and two days remotely, with two days off. This “3-2-2 workweek” has the potential to lead to greater access to talent, increased productivity, lower costs, and lower employee turnover. Each of these factors is of great importance to overall business valuation.

Structural shift in many industries

Pandemic-related lockdown measures have transformed workplaces, consumer behavior, and spending patterns across industries. We believe these changes will have a long-term impact on markets and the economy. In the apparel industry, we expect the shifts towards e-commerce and online shopping are here to stay. Logistics and digital payments have been positively impacted by remote work as well, while demand for most transportation, business travel, and restaurants in downtown areas declined. As a result of the COVID-19 pandemic, business travel has suffered, with deep impacts on the commercial aerospace and hospitality industries.

Many industries see new opportunities in the WFH climate. Numerous companies are enhancing the deployment of automation and AI in warehouses and manufacturing plants. Furthermore, the commercial real estate market has been deeply affected by the WFH trend. With fewer workers in traditional offices, there will be less non-residential construction. The demand for suburban residential construction is expected to increase as people move to smaller cities. This results in opportunities for single-family rental REITs. The automobile sector faced a decline in short-term individual sales. However, increased demand for delivery and cab services compensated for this.

Win-win for all?

The WFH culture potentially provides employees with greater freedom to pursue their careers, more flexibility, a better work-life balance, and time to spend with their family. However, the long-term mental impact on our society remains to be seen.

The cost-of-living gap between large and small cities continues to widen. Remote work allows employees to move to more affordable places. While employees move to different areas, many companies will still work with their most skilled staff. Companies with large offices and commensurate real estate expenses have the opportunity to save money on rents and leases by moving to smaller facilities. Most companies value sustainability, which includes cutting their carbon footprint. The WFH culture can provide a nudge in the right direction by reducing energy consumption, while employees contribute by reducing vehicle pollution.

Impact on business valuation

In certain industries, such as manufacturing, a wholesale WFH structure is not feasible. However, with the right processes, technology, and leadership, more functions can be performed remotely. Tech start-ups have the strategic advantage of incorporating WFH from the very beginning.

We expect a continued demand for better digital infrastructure and initiatives to help employees update their skills. Shifts from existing office leases and related onsite expenses result in immediate, and in some cases lasting, margin expansions. Investing in the technological needs and overall well-being of remote workforces helps to achieve high productivity. Resources such as home office equipment may qualify as one-time expenses and be added back to EBITDA, an important measure of the company’s overall financial performance.

On the other hand, poorly implemented shifts to WFH may hinder growth opportunities. This transformational period calls for close monitoring of each company’s valuation.

The new workforce system, accelerated by the pandemic, can have a major impact on your company’s business valuation. Our expertise at Cap Expand Partners allows us to objectively and independently assess the value of your business or that of a potential acquisition. From establishing a clear strategy to achieve your goals to providing insights into your company’s valuation. To learn more about our valuation services, please contact us directly.