“What have you been smoking,” or better yet, “what exhaust have you been breathing?” should be asked of the 89% of business owners who, in a SunTrust Bank study, stated they believe their firm’s value has not declined in the Great Recession.
On September 30, 2010 Jim Carney, who is with Bernstein Global Wealth Management, and I hosted one of our Quarterly Roundtable discussions. The title was, “who is on your (exit planning) team?” although the discussion turned to what is going on with valuations in today’s economy. We had a few people present who work with transactions and a couple business appraisers.
I left with the knowledge that there was universal agreement that valuations are down. Or stated another way, multiples of profit, EBITDA or whatever measure one uses are down. The biggest culprit is uncertainty. Everybody is unsure of what the future holds and that affects the risk buyers want to take, the value appraisers feel comfortable stating and how banks look at financing. We are volatile times and there is no end in sight to the volatility. Until there is comfort in what the future holds business valuations will not return to what they were 3-5 years ago.
Recently I spoke to an appraiser while in the middle of a client assignment. We got on the subject of comparable sales (done deals). He asked me if all the comparables were from prior to the recession (of course they were). He then stated they have to be discounted as times have changed.
Finally, there appears to be a wider gap between large and small firms. Just because an attorney just saw an 8X multiple on a $50,000,000 deal doesn’t mean he or she should advise their client they need to hold out for an 8X multiple on a $5,000,000 deal. As posted here previously small businesses have higher risk factors than mid-market firms. The loss of a key employee, loss of a top customer or extended downtime of a piece of machinery cause major disruption and loss of profit.
Owners thinking they will hunker down, wait for the economy to turnaround and then see an instantly higher valuation are sadly mistaken. If they don’t take action now to improve performance and profit they are going to be left behind and may see their valuation even lower than it is now.