What's Driving Down Small Business Valuation?

With a strong and growing economy, many small business owners are often shocked at the valuation they are seeing. So, what is the ultimate reason driving down valuations? We talked recently about the cooling business market, but why? Well, let’s getting into how small businesses struggle with valuation in this economy.

Fear of a Recession is Ultimate Reason Driving Down Small Business Valuations Now

You might say, recession, what recession? Hopefully, that optimism will resonate with small business brokers. But, in 2019, the specter of a potential recession on the horizon is holding valuations down.  

Over half (53%) of business brokers surveyed say a recession is the biggest concern especially for small businesses according to the Q3 2019 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project.  

It’s the law of gravity. What goes up must come down. We’ve had 10 years of expansion, so the market Is going to get spooked easily. Why? Expansions don’t last forever. This one has been one of the longest in history.  

Election Concerns Will Likely Keep Valuations Down in 2020

While this may be less concerning than a recession, even if one doesn’t come, this upcoming presidential election will add additional uncertainty. So, what should we think about for 2020? “20% of business advisors say the election next year is impacting the M&A market.” While this policy going together with the election, the fear of continued trade wars will also act as a headwind as long as Trump is in office.

The Fear of the Recession May Be Worse than the Actual Recession

Whenever we enter uncharted waters, the fear of the unknown can be worse than the unknown. It may take several months to build up confidence for valuations to return to historical levels. But, expect them to drop when any new negative economic news hits. The irony may be that we need to have a recession and recover for things to return to normal.