For business valuation professionals specializing in small and medium-sized businesses (SMBs), understanding the economic landscape that these businesses operate within is crucial. Recent trends show that SMBs in the U.S. are experiencing an unprecedented mix of optimism and uncertainty, and this sentiment can significantly influence the factors you consider when valuing such businesses. You can read full NFIB report via this link here .
According to a recent report from the National Federation of Independent Business (NFIB), while optimism has slightly improved, business uncertainty has reached an all-time high. As a valuation professional, it’s important to be aware of the multiple economic pressures facing these businesses, as they can have a direct impact on profitability, cash flow projections, and overall market outlook for valuation purposes.
1. Economic Uncertainty and Inflationary Pressures
The NFIB’s Uncertainty Index hit record levels in September, driven by a combination of political and economic factors. Business owners are expressing concerns over potential tax law changes, still-high inflation, and a challenging financial environment. For valuators, this heightened uncertainty means that projections based on past performance may need to be reassessed in light of future unknowns.
Inflation remains a significant issue, with 23% of SMB owners reporting high prices as their top problem. Many are responding by increasing their own prices to offset rising input costs. As you work on valuations, this inflationary pressure should be carefully factored into cash flow projections and pricing strategies, especially for businesses reliant on materials with volatile pricing.
When valuing manufacturing companies, particularly those in sectors like construction materials or automotive parts, business valuators pay particular attention to the risks related to cost inflation for these companies. These businesses face rising raw material prices such as steel, aluminum, or energy costs, which directly impact their profitability. When valuing such companies, it’s important to factor in not only the current cost pressures but also potential fluctuations in material availability and pricing over time.
2. Labor Market Challenges
While some reports suggest the labor market is cooling, SMBs are still struggling to fill open positions. One-third of business owners reported having job openings they couldn’t fill in September, and many are increasing wages to attract talent. Labor shortages can negatively impact a business’s capacity to operate efficiently, and rising wages can squeeze margins—both of which affect valuation outcomes.
As a valuator, consider these labor market dynamics when assessing operational risks and forecasting future performance. Pay close attention to how labor costs are impacting profitability and whether a business’s compensation strategies are sustainable in the long run.
One relevant industry would be the hospitality industry which is particularly vulnerable to labor shortages, as restaurants and hotels rely heavily on staff to provide services. Businesses in this sector have been forced to raise wages, offer incentives, or limit operations due to insufficient staffing. This impacts revenue generation and profitability, which should be carefully considered when valuing businesses in these sectors. Additionally, businesses offering specialized services, such as niche software development companies, also face competition for talent, driving up labor costs and affecting long-term financial stability.
3. Financing Costs and Borrowing Challenges
Although borrowing costs have somewhat stabilized, with fewer SMBs reporting higher interest rates on recent loans, access to credit remains a challenge. Only two percent of business owners were able to meet all of their credit needs, and some reported that obtaining loans has become more difficult than in the past.
For valuation professionals, this trend highlights the need to consider a company’s liquidity and access to capital when estimating its future financial health. Businesses that rely heavily on borrowing to finance operations or growth could face increased risk in the current environment, which should be factored into your discount rates or risk assessments.
When valuing a retail business, valuation professionals consider the material risk related to this industry’s seasonality. For example, to meet high season demand, these companies often rely on financing to purchase inventory ahead of peak sales periods. If access to affordable credit becomes more difficult, these businesses may struggle to maintain adequate inventory levels, potentially reducing sales and profitability. When valuing these businesses, it’s important to consider how credit restrictions could impact their ability to operate efficiently and capitalize on market opportunities.
4. Political and Tax Policy Uncertainty
The upcoming U.S. presidential election and uncertainty surrounding tax laws are additional sources of anxiety for SMB owners. With some tax cuts set to expire at the end of the year, many businesses are unsure how these changes will affect their bottom lines. For valuation practitioners, understanding the potential impact of new tax policies on cash flow and profitability is essential. Policy changes can alter a company’s financial structure, tax obligations, and overall valuation outlook.
Example: Professional services firms, such as legal or consulting practices, are often structured as pass-through entities like S-corporations or LLCs. These firms may face significant tax implications if tax laws change regarding the treatment of pass-through income or corporate deductions. Valuing such firms requires understanding how these potential tax changes might impact their after-tax income and the cash available for reinvestment or distributions to owners.
5. Profitability Pressures and Pricing Adjustments
Business owners are grappling with lower profits, with 14% attributing this to the rising cost of materials. A net 25% of SMBs planned to raise prices in September to counterbalance these costs, underscoring how inflation is eating into margins.
For valuators, this price-raising trend can affect competitive positioning and demand elasticity. While some businesses may successfully pass on cost increases to customers, others might struggle, depending on market dynamics and customer sensitivity to price hikes. This complexity should be reflected in your analysis of revenue streams and future growth potential.
Small manufacturing businesses producing consumer goods could see a reduction in demand if they raise prices too aggressively to compensate for rising material costs. Consumers may switch to lower-cost alternatives, impacting sales and overall profitability. When valuing such companies, it’s essential to assess both current pricing strategies and long-term customer demand elasticity.
Final Thoughts
As a valuator working with SMBs in the U.S., being attuned to the broader economic and political uncertainties affecting these businesses is key to delivering accurate and insightful valuations. Whether it’s inflationary pressures, labor market challenges, access to financing, or looming tax policy changes, these factors play a critical role in shaping the value of small and medium-sized businesses.
Staying informed on these macroeconomic trends allows you to make informed adjustments in your valuation models. In turn, this ensures that the owners, investors, or stakeholders relying on your analysis have a clear picture of the risks and opportunities ahead. As we move through this period of economic volatility, your expertise in navigating these complex factors will become increasingly valuable.
