Tips for Developing Your Economic Overview
A Field Guide to Business Valuation is available now, and it is an ideal first book for people who want to learn how to perform valuations themselves but have limited or no experience in the field. The authors have distilled their extensive experiences into a succinct and cohesive guide to help business owners estimate, preserve, and increase their business’s value. The following is an excerpt from Chapter 6, "Economic Overview and Industry Analysis."
Analysts should select an appropriate market area based on where the subject company offers its products and services and where its suppliers are located. Often, an analyst will perform an analysis of the national economy, the regional economy (e.g., the state in which the subject company operates as well as adjacent states), and the statewide or local economy. The availability of data often diminishes as one narrows the geographic focus.
Analysts focus on economic factors relevant to the subject company. As an illustrative example, consider the valuation of a residential construction company in April 2020, right at the initial outbreak of COVID-19. While we now know that many construction companies would be able to continue operating throughout the pandemic and emerge safely on the other side, we did not have the benefit of that knowledge in April 2020. At that time, an economic analysis may have considered the following factors.
- Housing starts: Housing starts dropped 22% from February 2020 to March 2020 as individuals’ personal financial situations suffered.3
- Mortgage rates: Economic uncertainty increased the risk for lenders, positively influencing mortgage rates. In response, the Federal Reserve attempted to decrease lending rates by lowering the target for the federal funds rate and purchasing mortgage-backed securities. These factors have contributed to volatility in interest rates.4
- Unemployment rate: The unemployment rate rose during the lockdown.
Economic difficulty, particularly regarding the number of housing starts and the unemployment rate, negatively affected many residential construction companies in the early months of the pandemic. Additionally, economic uncertainty associated with the pandemic contributed to an increase in marketplace risk, embodied through a drop in the value of publicly traded companies. An economic analysis prepared in April 2020 would likely point toward a decrease in value for a privately held residential construction company.
Understanding how economic and industry analysis can set the stage for your next valuation is just one of the many important topics this essential guide touches on. Get your copy and make sure you know everything you need to start valuing your business! You can learn more about A Field Guide to Business Valuation here.
3 Matt Egan, “Coronavirus Is Crushing US Homebuilding,” CNN Business (April 16, 2020). Available at cnn.com/2020/04/16/economy/housing-starts-march-coronavirus/index.html
4 Diana Olick, “Here’s Why Mortgage Rates Are All Over the Place—and How to Find a Good One,” CNBC (April 14, 2020). Available at cnbc.com/2020/04/14/coronavirus-how-to-find-good-mortgage-rates duringvolatility.html.