How Economic Factors Impact Business Valuations

It seems like every day, there is a new article about inflation reaching 40-year highs and the resulting impacts on everyday life. Whether it is surging vehicle or real estate prices, increasing labor costs, or eggs for $6-$7 a dozen, the effects of the COVID-19 pandemic continue to influence our lives. Because many of these effects appear to be less transitory than economists initially predicted, business valuation professionals must consider how these conditions impact valuations.

For much of 2020 and 2021, many business valuators excluded 2020 operating results in their analysis of ongoing earnings. The presumption was that the complete shutdown of some businesses, and the cascading effects across all industries, caused what would be considered a “non-recurring” impact on cash flow. Some businesses, however, greatly benefited from certain aspects of the pandemic. For example, companies that had readily available inventories of cleaning supplies or personal protective equipment experienced significant increases in revenue and profits. Similar to the companies that experienced declines due to the pandemic, these elevated levels of revenue and profit were not expected to continue.