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  • JASON BRICE | Business Broker

How Business Valuation Is Affected By Government Subsidies Related To COVID-19



COVID-19 has affected the economy in innumerable ways. While most people are concerned with the economic downturn and how COVID-19 has affected the ability of businesses to generate profit, buyers and sellers are also concerned with how government subsidies affect business valuation.


In this white paper, we’re going to look at how different government subsidies affect business valuation - more specifically, we’re going to analyze how they affect EBITDA (Earnings before interest, taxes, depreciation, and amortization.


What is the purpose of this white paper?

Determining the value of a business can be difficult at the best of times. EBITDA is a useful and relatively simple way of evaluating the profitability of a business. Government subsidies can inflate earnings, and some lenders and buyers may worry that government subsidies have artificially increased the profitability of a business. This could paint an inaccurate picture of how the business is expected to perform.


This white paper will teach you how government subsidies are deducted from EBITDA - if they’re deducted at all. Simply find the subsidies your business has been granted and read the appropriate section. It will teach you how lenders and buyers are likely to change their conception of your EBITDA based on that subsidy.


The paper is tailored to businesses in BC, as this is the community we serve. The information contained within pertaining to federal subsidies should, however, be of use to businesses throughout the country who are trying to make EBITDA calculations.


We’ve chosen EBITDA as a metric due to its relative simplicity, and its widespread use by both buyers and lenders. This white paper will be useful to both buyers and sellers as it will help both parties more accurately assess the value of a business and how this value will affect financing.


The EBITDA deductions laid out here are typical - they are, however, not universal. Every buyer, seller, and lender has agency in determining how government subsidies will be deducted from EBITDA. If you’re not sure what formula a given party used to establish an EBITDA, ask them.


CEWS and business valuation

The Canadian Emergency Wage Subsidy (CEWS) is treated differently depending on when businesses received the subsidy. The subsidy is also treated differently depending on which wages were subsidized.


  • For businesses that saw a drop in revenue from March-June 2020: CEWS is typically not deducted from normalized EBITDA calculations.

  • For businesses that saw a drop in revenue after June 2020: CEWS will typically be deducted from normalized EBITDA calculations. Note that many businesses saw a drop in revenue (and received CEWS) sometimes between March and June 2020 and didn’t see their revenue recover until long after that period (if at all). For these businesses, CEWS amounts received between March and June 2020 will not be deducted, but any amounts received after June 2020 will be deducted.

  • For businesses that were mandated by government policies to reduce staff hours: CEWS for affected employees will typically not be deducted from EBITDA. For example, suppose a tutoring company that normally employed 3 tutors per student was mandated by the Government of Canada to reduce staff to 2 tutors per student. 1/3rd of the tutors would not be allowed to work at a given time - as such, one-third of the CEWS the tutoring company received after June 2020 would not typically be deducted from normalized EBITDA calculations.


CERS and business valuation

The Canadian Emergency Rent Subsidy (CERS) is treated in much the same way as CEWS for the purposes of deductions to EBITDA.


  • For businesses that saw a drop in revenue from March-June 2020: CERS is typically not deducted from normalized EBITDA calculations.

  • For businesses that saw a drop in revenue after June 2020: CERS will typically be deducted from normalized EBITDA calculations. Note: Many businesses saw a drop in revenue (and received CERS) sometimes between March and June 2020 and didn’t see their revenue recover until long after that period (if at all). For these businesses, CERS amounts received between March and June 2020 will not typically be deducted from normalized EBITDA calculations, but any amounts received after June 2020 will typically be deducted.


CEBA and business valuation

The Canadian Emergency Business Account (CEBA) is a business loan offered by the Government of Canada with a forgivable amount. While the full amount of the loan will not be considered a part of the earnings of a business (as it must be repaid), 100% of the forgivable portion of the loan (25% if the rest is repaid before December 31st, 2023) will be deducted from normalized EBITDA calculations.


BRG and business valuation

The small and medium-sized business recovery grant (BRG) was a program offered by the government of British Columbia. Businesses who received the grant typically have the full amount they received deducted from normalized EBITDA calculations.


Understanding EBITDA calculations is imperative when buying or selling a business

We hope this paper has helped you better understand how to value a given business and the EBITDA calculations that lenders are likely to make in determining the value of that business. If you have any questions, contact Jason Brice.