The stock market matters, even to small-business owners. You might say – I own a local business. I know my customers. I know my employees and their families. How does Wall Street affect me?
In the stock market, movement up or down influences everything, including the multiples used to calculate business valuation. This is especially true when volatility disrupts market conditions (e.g., political uncertainty, the price of oil, and other factors.). Market swings impact business owners and their companies in three basic ways:
Credit: Debt and credit make interest rates critically important. The Fed controls funds, but banks set the rates they charge business people. General market conditions influence a bank's flexibility to set interest rates. They look at past performance to gauge a customer’s ability to repay a loan, but volatility plays a major role too. Market volatility creates uncertainty, fear, and doubt. Uncertainty increases risk. Risk drives up the interest rates that banks charge. If you are thinking of buying or selling a business, higher interest rates matter.
Consumer Confidence: People spend money based on three primary drivers:
Things they need
Things they think they need
Things they don’t need but want
When confidence wanes, things consumers don’t need but want fall out of their budgets – immediately. Next to go are things consumers think they need. Together, these two spending drivers make up a huge part of the economy, and the two areas are where most business owners make their livings. Many people are invested in the stock market (e.g., 401 K, retirement portfolios, etc.) and when there are uncertainty and volatility in the markets, spending slows down. If spending slows, the business ecosystem loses momentum, and most businesses notice a reduction in revenue. Of course, this impacts the value of a company.
The Competition: When volatility drives interest rates up, profits go down. When the economy slows, revenue slips. If these two things happen, business owners compete for smaller pieces of the pie. To win new business and keep current customers happy, owners squeeze sales margins and increase advertising spend. Consequently, better-capitalized competitors can hang in longer during a price-war than their less able competitors.
If you are interested in selling your business, you should sell when your multiples are high, not low. Owners that delayed the sale of their companies “one more year” before the last economic downturn either accepted a lower price or were never able to sell their company.
To get an accurate estimate of the value of your business and see how to receive top-dollar when you sell, call Steve Pope at Pope and Associates. (860) 388-4620
The American Dream of owning a profitable business and then reaping a financially rewarding exit is still alive and well. Regardless of economic conditions, businesses and practices continue to sell for the highest prices in history. Now may be the best time and your best opportunity to realize your dreams and cash in on your hard work.