Uncertain Times: Why (and How) You Need to Assess Your Business’s Value

August 15 2024 | 4 Min Read Time

Paul Vogt

E: pvogt@pcecompanies.com

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In today's unpredictable business environment, economic uncertainty is the only sure thing. Geopolitical tensions, fluctuating interest rates, supply chain disruptions, and the lingering effects of the COVID-19 pandemic are especially challenging if you’re an investor, a financial executive, or a business owner. This uneven economic landscape makes the accurate valuation of your company (or a business interest, an intangible asset, or even your debt) more difficult than usual—and more essential than ever.

Whether you're in the midst of reporting financial statements, attracting investors, selling or acquiring a business, or developing a strategic plan, regular business valuations are critical for staying informed about the worth of your company or of a potential investment. That's why you need to understand the factors that influence your company’s valuation and the strategic actions that can ensure your business is assessed at its optimal value.

What Factors and Methods Can Affect Your Company’s Valuation?

To make informed decisions for your business or investment, consider current market conditions and identify key trends that could affect your business’s value, including:

Market volatility. The stock market's ups and downs reflect broader economic sentiment and investor confidence. When markets are volatile, a company's future performance seems uncertain and investors become more cautious. The perceived higher risks can lead to lower valuation of your company.
Supply chain disruptions. Global supply chain issues in recent years have led to increased costs and delays in production. Higher operational costs and reduced efficiency may negatively impact your company's profitability, resulting in a lower valuation.
Interest rates. Central banks worldwide adjust interest rates to manage economic growth and inflation. Rising rates increase borrowing costs, which can restrict business expansion and reduce profitability, whereas lower interest rates can encourage borrowing and investment but might signal economic instability. Both scenarios can influence the valuation of your business.
Inflation. High inflation rates can squeeze profit margins as businesses face higher input costs without the proportionate increase in selling prices. Persistent inflation erodes purchasing power, increases the costs of goods and services, and can lead to lower valuations as future cash flows are discounted more heavily.

The method you choose to conduct your business valuation can also affect the results and will depend on your unique scenario. For example, the income approach determines value based on your business's (or business interest's) ability to generate future economic benefits, by forecasting your future cash flows and discounting them to their present value using an appropriate discount rate. Known as the discounted cash flow (DCF) method, this common technique provides a detailed analysis of your company’s expected financial performance.

The market approach, on the other hand, relies on financial ratios and multiples (such as price-to-earnings or enterprise value-to-EBITDA) to estimate value by comparing your business to similar companies that are publicly traded or have been recently sold. This method requires sufficient market data from comparable scenarios.

Finally, the asset-based approach values a business based on the fair market value of its net assets. Often suitable for companies in distressed situations or with significant tangible assets, such as manufacturing firms, this method provides a snapshot of the business's intrinsic value by adjusting the book value of assets and liabilities to reflect their current market values. Because the asset-based method does not capture your business's future cash flows, however, the valuation may not include important intangible or goodwill value inherent in your company.

What Strategic Actions Can Prepare You for Valuation?

Although no one can fully predict future economic conditions, you can control certain elements of your business that often translate to greater profitability and, consequently, higher valuations. For example:

Strengthen your financial reporting. Accurate, transparent financial reporting not only demonstrates that your business is well managed and financially sound, but also builds confidence among investors and potential buyers. Implementing robust reporting systems, regularly auditing financial statements, and ensuring compliance with accounting standards can positively impact your valuation. Be sure to maintain detailed and up-to-date income statements, balance sheets, cash flow statements, and tax returns, to offer a clear picture of your business's financial health.
Develop your strategic business planning. A comprehensive, well-thought-out business plan demonstrates to investors and valuers that you have a clear vision and a roadmap for achieving it. Create and regularly update a plan that outlines your business's strategic goals, growth strategies, market analysis, competitive landscape, and financial projections, to provide solid evidence for a lucrative valuation.
Identify and mitigate market, operational, financial, and compliance risks. Implementing risk management strategies—such as diversifying suppliers, hedging against currency fluctuations, and ensuring regulatory compliance—can enhance your business's stability and therefore its valuation. Diversifying your revenue streams, for example, can mitigate risk by spreading across different markets or products, particularly in an economic downturn; this approach stabilizes income while also making your business more attractive to investors and buyers, potentially enhancing its valuation.
Enhance your operational efficiency. Continuously seek ways to adopt new technologies, optimize supply chains, encourage employee productivity, and reduce waste—long-term measures that streamline operations while managing expenses, thus helping to maintain profitability. Implementing lean management and renegotiating supplier contracts can be effective strategies too, not to mention investing in digital technologies such as e-commerce platforms, customer relationship management (CRM) systems, and data analytics. Businesses that effectively leverage technology to improve efficiency, customer engagement, and competitive advantage tend to be valued higher due to their enhanced growth potential and operational resilience.
Monitor industry trends. Staying informed about industry dynamics, trends, and developments—such as technological advancements, regulatory changes, and market demand shifts—can help you adapt your business strategy accordingly. Being proactive in responding to industry trends can position your business for overall growth as well as higher valuations.
Build a strong management team. Professional advisors, such as financial analysts, accountants, and business consultants, can provide valuable insights and strategies to enhance your company's value. A competent and experienced management team is also a valuable asset: investors and valuers often look at the quality of the management team when assessing a business's potential. Invest in developing your leadership team, provide ongoing training, and create a succession plan to ensure continuity and stability.

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In uncertain economic times, understanding and managing the business valuation process is crucial for the success of your business. Stay informed about the factors affecting valuations; implement strategic actions to enhance your company's value; and seek professional guidance to understand the factors driving your valuation, identify areas for improvement, and develop action plans to address potential issues. By taking a proactive approach, you can navigate economic challenges and position your company or asset for growth and long-term success.