The Current Stock Market and Valuations of Closely Held Businesses

If you want to understand why the current stock market is going through the latest gyrations you can find out by asking any economist or investment advisor – in about 6 months.  Our financial gurus seem to have a knack for explaining why economic events happen after the events are long over.  Their ability to predict and project market behavior before the gyrations occur seems nil.

The basis of the valuation of closely held businesses, while observing historical data, is supposed to be a prediction of the future (see IRS Revenue Ruling 59-60).  How can we value closely held businesses in times of economic turmoil?  The best answer would be the phrase risk adjustment.  As valuation analysts do their best to make projections that determine business valuations they are cognizant that economic uncertainty introduces a higher degree of uncertainty that their projections will not behave as they anticipated.  This overall effect will be to reduce the valuations analyst’s opinion as to the value of a closely held business.

For both business owners desiring to sell their businesses and individuals desiring to purchase a business our advice is to tread cautiously.  Our preference is to wait until some of the economic turmoil is diminished and our forecasts have more certainty based on less turbulent conditions.