Wide Variability of Performance Pre- & Post-Pandemic

A Best Practice for Determining Business Valuations

Some thrived. Some closed. Some crashed early in the pandemic and now are making a comeback to pre-pandemic performance levels. One thing is certain: it has not been dull.

Since early 2020, we have seen tremendous variability in the financial markets and in business performance across industries. The pandemic has had a dramatic impact on where we work and how we work. Business models pivoted to offer touch-less service, online order placement and pick-up/take-out models. Businesses have soared and sunk. During these volatile two plus years, the same business may have experienced both; soaring and sinking. Peloton is such an example, early on in the pandemic their business soared; they were challenged to keep up with demand for bikes and treadmills; yet recently they have struggled. The business cycles have been extreme.

Today, more than two years after the start of the pandemic, inflation is high, interest rates have risen and recession indicators are many.

So, with all this volatility, how has valuation of a business been affected?

Business Valuation: The Drawbacks of Looking Back

Some look at the past as an indicator of future performance. Many professionals who prepare business valuations look at the five year average of the past to forecast future earnings. The volatility of earnings in the past two years highlights the flaws of this ‘mechanical’ approach. Past performance does not result in a valid or thoughtful determination of the value of a business.

Valuations After the Pandemic

Imagine business owners who have experienced peaks and valleys during the pandemic contemplating selling their business today? A ‘mechanical’ approach to business valuation based on an average of the past five years of earnings would be problematic for many businesses across many industries. The approach is fundamentally flawed and those flaws are exacerbated by the volatility of the past several years.

Be informed. As you speak to a business valuation expert, ask the method the professional adopts to prepare the valuation. If looking back is the view they take on valuation, I suggest you move forward.

A Best Practice: Look Forward

Valuation After the Pandemic

A best practice for business valuation is applying the discounted cash flow method. I have always espoused this method in preparing business valuations and the importance of adopting this method is highlighted in today’s economic conditions and accounting for the volatility of the past few years.

The Discounted Cash Flow Method is an income-based approach to valuation that is based upon the theory that the value of a business is equal to the present value of its projected future net benefits. This method understands that the past gives insight into the performance of the business, but the past does not dictate value. The fundamental difference in methods is the lens that is used: looking to the past vs. looking to the future.

The discounted cash flow method that I incorporate into the detailed business valuations prepared to withstand scrutiny look to the future to calculate the expected future economic benefits that will flow to the business owner, net of risks.

Starting with benefits: effectively applying this method requires that a business valuation professional understand and analyze the fundamentals of the business. This includes analyzing factors affecting demand, revenue, and profitability.

Today, many businesses are experiencing high demands for their products and/or services. Demand is up, revenue is up, but profitability is being squeezed due to rising costs of source materials, labor, and transportation costs due to rising gas prices. Early in the pandemic, we witnessed high demand for contractors, tradespeople, and appliances as home improvement projects surged. Today, costs are increasing at a rate that for most industries can’t be passed onto the consumer so while revenue may be up, profit margins are shrinking.

Then we look at the risks; many of which a business owner has little control over. Such macro risks include the effects of the war in Ukraine, inflation, high gas prices, and rising interest rates.

Risks specific or unique to the business include assessing the impact of the labor shortage on business operations, supply chain exposures, and a ‘hidden cost’ that is becoming more visible: the cost of the owner filling in as an employee; working ‘in’ the business vs. ‘on’ the business. For many businesses, this will have a negative effect on the long-term health of the business as strategic thinking is traded for near-term productivity. Such risks are noted and accounted for in the discounted cash flow method to calculating the net present value of future net benefits.

A Constant in the Chaos: The Discounted Cash Flow Method

Look forward. As a business owner, keep looking ahead and if you are considering selling, do not worry about the volatility of your business looking back over the past two years. The best method for valuation will look ahead, not back.

In the midst of chaos, certainty always appears elusive. Yet, for business valuation there is a constant. The best method to determine the value of a business is to calculate the net present value of future benefits.

If you have been referred to multiple business appraisers, ask what method they use to calculate valuation and inquire about their process and their track record. While complex in nature, the answers should be clear and understandable. When Values Matter, secure the expertise you and your business deserve. Contact us so the valuation of your business is not unnecessarily discounted.

Honored to Receive Prestigious NACVA Award at National Conference

At the National Association of Certified Valuators and Analysts (NACVA) Conference in June, Lou Pereira received the Massachusetts State Chapter President Leadership Award. “Being recognized in this way is a tremendous honor for me,” Lou observed, “adding that the success of the Massachusetts State Chapter is due to the efforts of the entire board who work to bring the best business valuation training programs here.”

The conference brought together on Zoom many of the best known thought leaders in the business valuation field. It provided the opportunity to discuss new and old issues with other top business appraisers.

NACVA is a global, professional association that delivers training from the nation’s leading experts in consulting fields such as business valuation, financial litigation forensics, expert witnessing, forensic accounting, risk fraud management, mergers and acquisitions, business and intellectual property damages, fair value, healthcare consulting, and exit strategies. Along with its training and certification programs, NACVA offers a range of support services, reference materials, software, and customized databases to enhance the professional capabilities and capacities of its members.

NACVA’s Certified Valuation Analyst (CVA) is the only business valuation credential accredited by the National Commission for Certifying Agencies (NCCA) and the American National Standards Institute (ANSI).

Read more about Lou Pereira’s qualifications…

Independence Matters Every Day in Business Valuations

As July 4th approaches, Americans seem poised to celebrate Independence Day with more spirit than ever. Yet, here at Merrimack Business Appraisers, independence holds meaning for us all year long.

In order to promote and preserve the public trust, our appraisal practice observes the highest standards of professional ethics, including an unwavering commitment to independence. This means that we are free from outside control, obligation, or bias due to a personal interest.

The Appraisal Foundation, a private, non-profit educational organization and the nation’s foremost authority on the valuation profession, ensures that an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.

  • The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) has established ethical and performance standards for the appraisal profession in the US. Adopted by Congress in 1989, USPAP is updated every two years so that appraisers have the information they need to deliver unbiased and thoughtful opinions of value. Read more…
  • The selection of a business appraiser must be undertaken with great care, as issues affecting valuation can be complex and confusing. USPAP provides important guidance in the form of Advisory Opinions and Frequently Asked Questions. Read more…
  • Louis Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country, and Lou Pereira is one of them. In New England, he is one of only a dozen having earned the rigorous designation of Certified Business Appraiser. Read more…

At Merrimack Business Appraisers, we are here to help when you need a business valuation. And you can always count on our independence.

When Values Matter – Objectivity is a Must

Did you know that an appraiser must promote and preserve the public trust inherent in appraisal practice by observing the highest standards of professional ethics?

We at Merrimack Business Appraisers pride ourselves on being unfailingly objective.

The Appraisal Foundation, a private, non-profit educational organization, ensures that an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.

The Appraisal Foundation is the nation’s foremost authority on the valuation profession. The organization sets the Congressionally-authorized standards and qualifications…and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals.

(Source: Uniform Standards of Professional Appraisal Practice 2020-2021 Edition, The Appraisal Foundation, page E.)

The Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) has established ethical and performance standards for the appraisal profession in the US. Adopted by Congress in 1989, USPAP is updated every two years so that appraisers have the information they need to deliver unbiased and thoughtful opinions of value. Read more…

The organization also provides important guidance in the form of Advisory Opinions and Frequently Asked Questions. The issues affecting valuation can be complex leaving the marketplace often confused which is why the selection of a business appraiser must be undertaken carefully. Read more…

Louis Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country, and Lou Pereira is one of them. In New England, he is one of only a dozen having earned the rigorous designation of Certified Business Appraiser. Read more…

At Merrimack Business Appraisers, we are here to help when you need a business valuation. And you can always count on us for objectivity.