You heard the old adage, ‘time and tide wait for no man’. None more apt than in business appraisal. You don’t have to go back a ways to see why. Remember the heady days of the Great Recession? Businesses were trembling in anticipation, markets creaked at the seams, and politicians spouted their usual platitudes and wishing it would all go away.
Admittedly, this was a cataclysmic event the likes of which we hope never to see again. But wait, what about the Great Depression of the 1930s and the collapse of the world stock markets? Clearly, even the rare events can and do recur.
The truth is, markets are living breathing organisms. Fortunes change, people enjoy the good times and run for the exits when the clouds gather. Investor sentiment is as volatile as a morning mist on a hot summer day.
Markets are volatile, business values change all the time
Political uncertainty, trade wars, hot wars, threats of economic instability all contribute to major shifts in how business people see the future. You can see this clearly in the public capital markets – people vote with their pocket books once they discern where the wind is blowing.
Now, no one is bigger than the game, your business included. If the risks mount, safer havens are a better bet for investors. Think government bonds with guaranteed coupon rates and repayment of the principal on time. Sounds a lot less risky than a company struggling to weather an economic storm.
In times of economic expansion, you can expect things to calm down, the risks to subside, and investors to crack their wallets open again with an appetite for business investment. Buying of existing companies in such times ramps up and prices paid express the investors’ optimism about the future.
Check the market pulse in times of change
Using the market approach to business valuation is an excellent idea in times of economic upshifts or downturns. You watch the M&A activity in your industry and spot trends as business buyers and sellers close deals. If your own business is comparable to the active market players, you can work out what it is worth on the market right now.
Business sale prices as indicator of fair market values
This ‘going rate’ business valuation is one of the biggest reasons market approach is so useful. All you do is watch the actual transactions, gather the selling prices, calculate the valuation multiples and estimate the value of your business.
The fair market value figure you get from this is a good indicator of what your business would sell for if you put it on the market. The winds of change can go with you or against you. In either case, knowing the way is half the journey.