Your Business Valuation: Finding Answers In An Uncertain World
By Matt Gadow, Farrell Growth Group, a leading agribusiness consulting firm.
We never have absolute certainty, but we may have a drop more than we did on Nov. 2. For several years, it appears we’ll have Washington gridlock, which would fend off what could have been massive changes to the nation’s tax and legal structures. Such changes would most certainly impact business and valuation interests and create even more widespread uncertainty.
A prospective change in corporate tax rate can immediately affect business valuations. Just as the corporate tax rate reduction from 35% to 21% in 2017 had a significantly favorable impact on business valuations, a rate change to 28% or higher would have a boomerang effect—to some extent—in lowering business valuations. That’s not because most independent sellers walk away with less after-tax money, but rather corporate buyers of independent businesses project those tax rates into future earnings and net cash flow. Ultimately, those considerations affect the price buyers are willing to pay today. It appears a corporate tax change is less likely if gridlock ensues in coming years, but three other factors could impact your business valuation and/or net proceeds estimate.
Regulation
This remains a key topic for both sides of the aisle. Adding regulations or renewing previously eliminated regulations could mean an impact to your product offering and sales intensity for some key products or services.
Capital Gains
The rates and related rules should be watched. They’re always a highly contested topic on Capitol Hill. As the old merger and acquisition adage goes: “It’s not what you sell the business for, but it is what you walk away with.”
Margin Erosion
This has occurred slowly in the past six years. A few retailers have expanded margins, but that’s more of the exception than the rule. Margin trends are perhaps the single largest factor in determining the value of a business.
It is a healthy exercise to continually review your business valuation and regularly assess the factors that may be changing the assessment. Business owners should not rely solely on history to determine the value of their businesses. They need someone asking the right questions about the right topics to mirror how and why a prospective buyer may view a business’ value. Many of Farrell Growth Group’s customers have been pleasantly surprised at the outcome of their valuations after assessing the factors that can impact the results. Valuation assessment is a critical part of being a strategic business owner and being proactive versus reactive.
