Business valuation professionals are no strangers to dealing with market uncertainties — and neither are business owners and investors. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.
Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.
Here are some considerations when valuing a business in today’s volatile political climate.
Valuation experts constantly monitor market conditions. Realistically, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.
Experienced appraisers understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response. In today’s marketplace, they understand that politicians have many divergent plans that may (or may not) be approved or take effect.
In the meantime, business owners and investors should stay calm and carry on. A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future.
Public Markets Respond to the Election Results
Following the election and through the end of 2016 — the effective date for many private business valuations — the Standard & Poor’s 500 Composite Stock Price Index, a leading indicator of large stocks, has responded positively.
Specifically, the S&P 500 index increased from $2,139.56 on November 8, 2016, to $2,163.26 on November 9, 2016, an increase of 1.1% from the closing price on Election Day. As of December 31, 2016, the S&P 500 index had risen to $2,238.83, an increase of 4.6% compared to the closing price on Election Day.