Changing Markets Affect on Valuations

Changing Markets Affect on Valuations

Economics back in January 2021

Back in early 2021 there were certain signs that the economy was going to change in some way, and many predicted this change would not be positive.  Post Pandemic in January 2021 the U.S. Government continued to pour billions of dollars into the economy by printing more money. Economics 101 tells us supply and demand concepts would kick in, and they did. More supply and no growing demand made the U.S. dollar weaker. In late 2020 I had an investment banking firm tell me that in the next 18 months, enterprise values would begin a decline. I believed it and communicated that to our clients looking to sell.

Then on top of that oil prices continued to climb.

 January 2020 near $25/Bbl

January 2021 near $70/Bbl

January 2022 near $100/Bbl

June 2022 near $103/Bbl

(Ref: Trading Economics WTI)

I have recently had friends tell me that the President does not affect oil prices. I do not believe that. When a President signs an executive order to cancel major oil pipelines and retract permits and leases for drilling on federal lands, it restricts oil supply. That paints a very negative picture to oil and gas investors. Again, basic economics 101 kicks in and price of oil starts increasing dramatically after those presidential orders take place. Wars in Eastern Europe that started one year later are simply an excuse.

The Markets

Every product finds its way to a truck for transport eventually. Ships and Airplanes are also a huge part of transporting products to consumers. With the rise in oil prices and over supply of U.S. dollars we are now all experiencing an increase in pricing at the pump and grocery store checkout. Inflation has really kicked in.

Valuation of Companies

So, you ask, how does all of this affect the valuation of companies? Well, it’s kind of the perfect storm for decreasing pricing of values.

In the last 10 years the M&A market has seen record prices for sale of businesses, and valuations. There is a normal business cycle that takes place with valuations, and that cycle is about every 7-10 years. On top of that the baby boomers have been selling their businesses in record numbers the last few years, taking advantage of the high valuations.

In many acquisitions leverage is used to acquire companies. When you have record low interest rates like the U.S.A. has the last 10 years, the Buyers are able to borrow more debt to use as part of the consideration when acquiring a business. This enables the Buyer to afford a higher valuation. Now that interest rates are creeping up, Buyers are not able to borrow as much to get the return they want. So valuations start coming down.

In the last 2-3 years with the pandemic causing shortages and the fear of interest rates creeping up, we have all witnessed crazy high prices for the following:

  • Homes
  • Cars
  • Boats
  • Airplanes
  • Companies
  • Metal Scrap Prices

There has been a “run on the market” for the items above in 2021.  Record setting high selling prices. I have personal experience with all of the above, either personally or with clients. I have seen the record high price for each of those items, and since March 2022 I have seen each one of those items listed above get soft on pricing. Interest rates keep creeping up as of June 2022, the stock market has pulled back and this is making buyers and investors a bit nervous about the near future.  Since spring 2022 I have seen business owners that started discussions and an LOI in 2021,  now facing weaker markets and watching valuations come down.  I know of three specific deals that got pulled off of the market due to lower valuations since last year.

A word of Wisdom if you want to sell

Get to a sale and closing ASAP. I predict that the value and valuations on the items listed above will continue a decline for the rest of 2022. We may not see another peak for enterprise values for several years. If you are a Buyer, maybe now is the time to put the brakes on and revisit that purchase in Spring 2023 when there are going to be some deals to be made at lower prices.

Download a free copy of our Top 10 Destroyers of Value tool to help maximize the value of your business before you sell.

ARTICLES YOU MIGHT LIKE

Product Life Cycle Stages

See also: Product Life Cycle Company Life Cycle Why You Need a New Pricing Strategy Increasing Pricing on Products What is the Product Life Cycle? A product life cycle includes stages the product experiences throughout its lifetime – from conception of the idea to the decline and abandonment of the product. Some products experience longer

Read More »

Why Valuation Matters

The other day, a client asked why valuation matters. It seems like a lengthy process that is complex and differs in each case. You see, I didn’t respond in an elaborate explanation of the different methods of valuation. Instead, I start off by saying that life is very unpredictable. Have you ever experienced a life-altering

Read More »

Increasing Pricing on Products

Recently, Netflix – streaming service giant – increased their pricing on two of their products by more than 10%. At first, media and customers displayed anger and backlash. But after the pricing increase, many customers remained at the increase was approximately a $1 difference. Plus, you have to factor in that many people are “cutting

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

September 12-15th 2022