Adjusting Valuation for COVID-19 or Disrupted Years

Valuing a business is never simple, but recent years have been anything but normal. COVID-19, Brexit, supply chain chaos, and energy price shocks have all played havoc with the numbers. If you're planning to sell, raise investment, or just want a realistic picture of what your business is worth, how do you adjust for these extraordinary years? In this guide, we break down the practical steps, accepted UK approaches, and common pitfalls when valuing your business after a period of disruption. You'll get real-world advice to help ensure your valuation is credible, defensible, and tailored to today’s market – not just a historic average that no longer fits reality.

A business valuation is only as good as the assumptions behind it. For decades, UK buyers, sellers, and lenders have relied on established methods – usually based on historic accounts, profit multiples, or discounted cashflow. But what happens when recent years are outliers, as with COVID-19, lockdowns, or other external shocks? The numbers on your P&L may paint a distorted picture that neither reflects your business’s true earning power nor its prospects.

COVID-19 saw entire sectors shuttered virtually overnight, government support schemes like furlough and grants, and unpredictable consumer behaviour. For some, revenues plummeted; for others (e.g., e-commerce, PPE suppliers) sales spiked unsustainably. These swings distort any average or trend analysis. And even as we move past the pandemic, aftershocks – like inflation, staff shortages, and supply chain issues – continue to cause volatility in the numbers.

This matters because a fair valuation must reflect an underlying, sustainable level of performance. Overstating earnings (by including a one-off grant or lockdown windfall) or understating them (by using unusually bad years) can lead to disputes, failed deals, or HMRC scrutiny. UK investors and acquirers are increasingly cautious, and will want to see your adjustments justified with evidence, not wishful thinking.

• COVID-19 is not the only source of disruption – consider Brexit, energy crises, or sector-specific shocks.
• Historic valuation multiples may not apply after major external shocks.
• Transparency in your adjustments is crucial for credibility.
• HMRC will challenge valuations that don’t make reasonable adjustments for non-recurring items.

Adjusting for disrupted years is essential whenever your recent accounts include periods that are not representative of normal trading conditions. In the UK, this isn’t just best practice – it’s expected by buyers, lenders, and tax authorities. The justification is simple: a buyer or investor wants to know what the business is likely to achieve in a normal year, not just what happened during unprecedented circumstances.

You must adjust if your results were impacted by factors outside your control that are unlikely to repeat: forced closures, government restrictions, exceptional grants, or demand surges that have since subsided. This also applies if you received temporary cost savings or incurred exceptional costs (e.g., PPE, reconfiguration for social distancing). The goal is to exclude non-recurring, non-operational items and focus on the underlying performance.

In the UK, HMRC expects a 'prudent and reasonable' approach to valuation, especially for tax purposes (see the Shares and Assets Valuation manual). If you’re selling, buyers will scrutinise your adjustments and may insist on their own. If you’re raising finance, lenders may apply their own ‘normalisation’ to your figures. Being proactive and transparent about your adjustments builds trust and can prevent delays or disputes later.

• Adjust if your business had to close, partially or fully, due to government mandates.
• Adjust for any COVID-19 grants, furlough, CBILS/BBLS loans, or similar support.
• Exclude one-off costs or savings related to pandemic adaptations.
• Explain any sector factors – e.g., hospitality hit harder than tech.

The central principle is to find a credible, defensible estimate of your business’s 'maintainable earnings' – what it can generate in a typical year. This is the figure most UK valuation methods use, whether you’re applying a multiple (e.g., EBITDA, P/E) or a discounted cashflow. To do this, you must identify and strip out non-recurring, exceptional, or non-operational items from your historic accounts.

You’ll also need to justify these adjustments with documentation and clear reasoning. For example, show that furlough income or business rates grants were one-off support, not a regular source of income. Equally, if you had a surge in sales due to pandemic demand (e.g., selling masks), you’ll need to demonstrate why this is not expected to continue. Try to use at least three years of pre-disruption accounts as a baseline, if available.

It’s important to avoid the temptation to cherry-pick only the best years or exclude all negative impacts. Buyers and HMRC will expect to see both sides: if you remove exceptional costs, you should also remove exceptional gains. The process must be even-handed, evidence-based, and consistent with guidance from professional bodies like the ICAEW, RICS, and the British Business Bank.

• Remove one-off government support (CJRS, SEISS, Local Authority grants, etc.).
• Adjust for non-recurring cost changes (e.g., PPE, fit-out for distancing).
• Normalise any temporary revenue surges or drops.
• Use sector data to justify adjustments, especially where your experience mirrors the wider market.

Adjusting for disrupted years isn’t a box-ticking exercise – it’s a detailed process. Here’s a practical, step-by-step approach used by UK accountants and business brokers. The aim: arrive at a credible, 'normalised' profit or cashflow figure that reflects the business’s underlying capacity, not just the latest set of accounts.

Not all valuation methods handle volatility equally. In the UK, the most common approaches for small businesses are earnings multiples (like EBITDA or P/E), discounted cashflow (DCF), and asset-based methods. After disrupted years, you must be especially careful with methods that rely heavily on the latest year’s results or simple averages.

Earnings multiples should be applied to an adjusted, maintainable profit figure – not the unadjusted pandemic year. For DCF, your forecasts must reflect a realistic return to normal, with careful attention to the assumptions about growth and margins. Asset-based valuations may be more appropriate for businesses with significant fixed assets, but for most trading businesses, buyers and lenders will want reassurance that cashflow can recover.

Market-based approaches (comparing recent deals) can be problematic, as deal volumes and multiples fluctuated wildly during and after COVID. Look for comparable transactions post-pandemic, ideally in your sector, to benchmark your own valuation. Always sanity-check your result against multiple methods, and be prepared to justify your approach with up-to-date data.

• Earnings multiples: Use adjusted, not raw, profit figures.
• Discounted cashflow: Build conservative, justifiable forecasts.
• Asset-basis: Only use if value is in tangible assets, not cashflow.
• Market comparables: Focus on post-disruption deals in your sector.

One of the biggest complications in UK business accounts since 2020 is the presence of government support schemes. The Coronavirus Job Retention Scheme (CJRS, or furlough), Self-Employment Income Support Scheme (SEISS), Business Rates Relief, and local authority grants all provided lifelines – but they are strictly non-recurring. Including them in your EBITDA or net profit overstates the underlying earning power of your business.

To adjust, you must remove all such income from your profit and loss when calculating ‘maintainable earnings’. This also applies to any COVID-specific loan forgiveness or write-offs. If furlough income supported staff whose roles are now permanent again, you need to normalise staff costs to what they would be in a typical year. Be precise – buyers and HMRC will want to see your working and evidence for every adjustment.

Don’t forget the flip side: if you incurred exceptional costs to stay open (e.g., PPE, screens, staff re-training), these should be added back as one-off expenses. On tax, be aware that HMRC expects these adjustments when valuing shares for business sales, Employee Ownership Trusts, or inheritance tax purposes. Failure to do so can lead to tax disputes and penalties.

No two sectors were affected equally by COVID-19 and related disruptions. In the UK, hospitality, leisure, and travel businesses often saw revenues drop to zero for months, while tech, logistics, and online retail frequently grew. When valuing your business, it’s crucial to benchmark your performance and recovery not just against your own history, but against what’s typical for your industry.

Sector-specific data from the ONS, trade bodies, or your own industry group can help justify your adjustments. For instance, if your pub’s turnover dropped 70% in 2020, but the sector average was a 60% fall, you’ll need to explain the difference. If your e-commerce sales doubled in 2020 but have since reverted to trend, buyers will want to see evidence that the spike was exceptional, not the new normal.

Recovery rates also matter. Some sectors bounced back quickly, others remain below pre-pandemic levels. Use published data and forecasts to inform your projections and support your valuation. This helps avoid unrealistic optimism and ensures your valuation stands up to external scrutiny.

Many UK business owners and even some advisers make crucial errors when adjusting for disrupted years. The most frequent mistake is a lack of transparency: unexplained adjustments, missing documentation, or ignoring the impact of support schemes. This invites suspicion, slows deals, and can trigger HMRC challenges.

Another common error is over-optimism – assuming a quick return to pre-disruption performance without evidence. Some owners simply exclude bad years from their averages, or fail to account for permanent changes (e.g., increased wage costs, changed customer habits). This undermines credibility and can result in overvaluation.

Finally, some businesses use outdated valuation multiples or irrelevant market comparables from before the pandemic. The UK M&A market has shifted: buyers are more cautious, and sector multiples have changed. Always use the latest data, and justify your choice of method and assumptions.

• Document every adjustment with clear evidence.
• Don’t use unsupported forecasts or ignore permanent changes.
• Avoid cherry-picking only the best years.
• Use current, sector-specific multiples and comparables.
• Be open about uncertainties and risks to future earnings.

Buyers and investors in the UK market are well aware that the last few years have been unusual. Most will expect to see a clear, transparent reconciliation between your reported accounts and your adjusted, maintainable earnings. They will scrutinise your adjustments, challenge anything that seems aggressive, and may apply further discounts for risk or uncertainty.

For tax purposes, HMRC looks for 'open market value' – what a willing buyer would pay, with full information. If your valuation includes unadjusted COVID support or ignores exceptional costs, you risk a challenge. The Shares and Assets Valuation team has published guidance specifically on COVID-19 adjustments (SAV Manual), and they expect a balanced, evidence-based approach.

Good advisers (accountants, brokers, corporate finance specialists) will help you prepare a robust adjustment schedule and pre-empt likely challenges. The Federation of Small Businesses recommends seeking sector-specific advice and using up-to-date market data. Building trust with your buyer or investor is critical: be transparent, share your workings, and be prepared to discuss different scenarios for recovery.

• Buyers may apply their own, more conservative adjustments.
• Investors will want to see downside and upside scenarios.
• HMRC expects adjustments for all non-recurring COVID items.
• A clear, well-documented adjustment schedule builds trust.

Not every UK business fits the classic 'steady trading' model. Startups, scale-ups, and businesses that grew rapidly during the pandemic face unique challenges. For early-stage businesses with little or no pre-pandemic track record, you need to focus on forward-looking metrics: pipeline, recurring revenues, and evidence of traction post-disruption.

If your business boomed during COVID – for example, online retail, home fitness, or PPE suppliers – you must demonstrate which aspects of that growth are sustainable. Investors will discount any revenue spikes that have since faded and will look closely at post-pandemic performance. Again, sector data and transparent forecasts are key.

For distressed businesses, the opposite problem applies: recent losses or closures may understate the business’s potential. Here, buyers often use asset-based valuations or apply very conservative multiples. If you believe the business can recover, provide clear evidence (e.g., bookings, contracts, recovery plans) to support your case. Honest discussion of risks is essential to maintain credibility.

• Startups: Focus on future pipeline, not just historic numbers.
• COVID boomers: Prove which gains are sustainable.
• Distressed businesses: Use asset or recovery-based methods.
• Always supplement historic numbers with post-disruption trends.

If you’re preparing to sell, raise finance, or just want to understand your value, don’t leave adjustments for disrupted years as an afterthought. Start early, involve your accountant, and be ready to explain every adjustment. The UK market is cautious, and a credible, defensible valuation can unlock better deals and smoother transactions.

Gather all documentation now – grant letters, furlough claims, evidence of closures or reopenings, and correspondence with suppliers or landlords. Use ONS data, sector reports, and guidance from trade bodies to benchmark your performance and justify your assumptions. If you’re not sure, speak to a specialist broker or corporate finance adviser with experience in your sector.

Finally, remember that valuation is as much art as science – but the more transparent and evidence-based your approach, the more likely you are to achieve a fair price. In the current UK market, credibility is everything.

• Start your adjustments early, before negotiations begin.
• Involve a qualified accountant or adviser.
• Benchmark against ONS and sector data.
• Keep all supporting documents for adjustments.
• Be open about risks and permanent changes.
• Test your valuation with multiple scenarios.