How to value a business when comparable business sales fizzle out

Business sales tend to drop during economic downturns. None more so than in the midst of a world wide pandemic affecting all customer facing companies. Are you are doing business on the Web? Then your customers may be distracted dealing with a host of problems caused by the troubled economy.

Business sale comps

It is common practice to use market comps when valuing a business.  For instance, you are grooming the company for sale. You look around for recent sales of comparable companies in your neck of the woods. Then work up your own business value estimate.

This works well so long as the business sale transactions keep coming. Guess what happens to business sales in times of economic trouble? Correct, they dry up. Business buyers pull back fearful to invest in companies that may fail due to market stress. Business owners change their mind about a planned sale unwilling to let go of their company for a pittance.

The effect is a sharp decline in market comps you would need for your business valuation. What to do?

Asset and income based valuation methods

Remember that there are two other ways to value any business: income and asset approaches. The beauty of the income approach is that you do not need to run any comparisons. Instead, you focus on valuing your company based on its own income generating capacity and risk.

Asset based valuation methods are also not comparative. Again, your business valuation focuses on your subject company directly, sidestepping the problem of the weak business sales market.

When to drop business sale comps

While all major business valuation standards encourage the use of all three valuation approaches, you are allowed to depart from this general prescription. For example, if you are unable to gather sufficient number of recent business sales to run a market comparison, it is perfectly fine to focus on the income and asset valuation methods instead.

When you compile your business valuation report, state that due to the challenges in the economy there is lack of comparable business sales at the moment. As a result, your valuation analysis relies on the alternative valuation methods. This way, the readers of your report will not suspect a glaring omission and know that you have used the best valuation methods available at the time.

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