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How the Market Impacts Closely-Held Business Valuations

Posted in Business Valuation, on Mar 2024, By: Mark S. Gottlieb

When valuing any business, one of the most important factors to consider is the overall market environment. After all, market conditions have an enormous influence on a company’s performance and what buyers are willing to pay.

Privately owned businesses have more protection from immediate market fluctuations than publicly traded companies. But over the longer term, market forces always make their way into financial statements and operational health.

In a strong, growing economy, valuations tend to be more generous when demand is high and access to capital is easy. Buyers have more confidence that a target business will continue thriving, allowing them to forecast future solid cash flows. This leads them to place higher multiples on a company’s earnings.

Of course, the reverse is true in weaker, uncertain economies as well – buyers become more conservative in their projections, and valuations reflect that uncertainty.

Market swings can impact industries and niches very differently, too. For example, a recession may completely deflate valuations of discretionary consumer businesses like gift shops when households pull back spending. As we saw during the result of the pandemic, demand for discount retailers and certain services may remain stable or even grow during downturns. Evaluating the market’s impact requires a nuanced, segment-by-segment analysis in addition to big-picture economic factors.

An accurate business valuation must determine how the current market will likely affect future operations. As experts, we analyze historical performance, competitive forces, supplier costs, commodity prices, consumer demand, access to labor, and other external variables that impact profit margins and growth potential. We fold this into a qualitative assessment of the market’s influence when using income, market-based, and asset valuation methods.

Getting these assumptions right is crucial for establishing defendable value conclusions that will hold up to scrutiny. It will render sound valuations that accurately reflect a company’s position in the real-world marketplace.

To discuss your case further, schedule a call with our team leader, Mark S. Gottlieb, CPA/ABV/CFF, ASA, CVA, CBA, MST.