Jane Tereba | May 22, 2025
At recent networking events, every conversation I have had has revolved around the same question:
How does today's economic uncertainty affect private company business valuations?
It’s a complicated topic, but generally speaking, uncertainty leads to increased risk and volatility, which in turn pushes valuation conclusions down. Business valuations during periods of economic instability often reflect decreased projected cash flows and higher perceived risk.
This provides a unique, albeit fleeting, opportunity for business owners to rethink value strategies, particularly with the estate tax exemption set to expire this year. Savvy owners can use this moment to engage in advanced wealth planning and protect long-term financial outcomes.
Key Economic Factors Driving Valuation Trends
1. Tariffs
Trade policies, including tariffs, can raise operating costs for many businesses. When companies face increasing input costs or reduced access to materials, their profitability takes a hit, which affects valuation projections.
- Example: Higher tariffs can reduce international trade revenue for companies reliant on imports or exports, directly impacting their projected cash flows.
2. Debt Levels
The U.S. debt-to-GDP ratio has skyrocketed, reaching 122% as of late 2024 (compared to just 60% in 2008). High debt impacts the economic climate by driving inflationary pressures and increasing borrowing costs, which trickles down to private businesses.
- Business Impact: Companies dependent on financing may find it harder or more expensive to secure loans, resulting in strained growth opportunities.
3. Interest Rates
With fluctuating and generally higher interest rates (as of April 2025, U.S. constant maturity treasury rates hover around 4.38%), the cost of capital rises for businesses. For valuation purposes, this means discount rates increase, compressing the present value of future cash flows.
- Valuation Implication: Higher discount rates contribute to lower business valuations, particularly for companies in growth or capital-intensive phases.
4. GDP Growth
Economic uncertainty is also reflected in GDP growth rates. While earlier forecasts projected higher real GDP growth, revised estimates indicate a slowdown, with 2025 numbers hovering around 1.8%-2.1%.
- Why It Matters: Slower economic growth dampens business expectations across sectors. For business valuation, reduced long-term projected cash flow becomes a reality.
5. Inflation
Inflation reduces purchasing power and increases input costs for businesses. Despite some stabilization, long-term inflation estimates remain a concern for private companies.
- What This Means for Business Owners: Persistent inflation ripples through operational costs and reshapes profit margins, both of which directly lower business valuations.
Why This Might Be the Perfect Time for Value Planning
We encourage business owners to manage their business as an investment. When uncertainty leads to reduced valuations, opportunities for strategic wealth transfer emerge. With the estate tax exemption set to expire, transferring ownership of a business at a lower value could reduce estate tax liabilities substantially. This window allows business owners to maximize wealth for future generations with effective planning.
Consider advanced strategies such as gifting shares of the company or setting up family trusts during this period. Lower valuations today could result in greater savings tomorrow, as asset values recover post-instability.
What Should You Do Now?
Evaluate Projected Cash Flows
Work with a professional to revisit financial projections. Ensure they incorporate the impact of tariffs, rising costs, and other macroeconomic factors.
Reassess Risk Factors
Business valuations rely heavily on the perceived risk of your industry and operations. Take stock of how external factors may increase volatility and ensure your valuation reflects reality.
Engage in Wealth Planning
Explore estate planning options with a trusted advisor to take advantage of the current market conditions.
Consult Business Valuation Experts
Given the complexity of private business valuations, consulting with professionals ensures accurate assessments. Experts can account for market risks and shine a light on how you can protect your business value.
Take Advantage of Change
Economic uncertainty doesn’t just bring challenges; it also creates opportunities for informed decision-making. Lower business valuations open doors to estate planning strategies that can help secure your financial future and legacy.
If you’re ready to take the next step, we’re here to help. Contact us to schedule a consultation tailored to your business valuation and wealth planning needs. The right strategies today can safeguard your success tomorrow. Schedule a Complimentary Consultation
