ValuAdder Business Valuation Blog

Business valuation tips, updates and advice. Pick up a few suggestions on how to value a business. Feel free to browse the contents or share your thoughts by leaving a comment.

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. Even if you are doing business on the Web, your customers may be distracted dealing with a host of problems caused by the troubled economy.

It is common practice to use market comps when valuing a business, especially if the company is groomed for sale. You look around for recent sales of comparable companies in your neck of the woods and 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?

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.

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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