Profiting From the Business Cycle
Why is there a business cycle? Someone once noted that people could tolerate any condition except the possibility of one. This one condition is prolong periods of prosperity. Incredible as it seems, this observation contains more than just a kernel of truth, and helps to explain where we are in our current business cycle.
When the economy starts to recover from a stiff downturn, people are understandably doubtful about the tenacity of the young expansion. They hold back on their discretionary spending and their use of debt. As the upswing continues to gather force, people tend to become less risk averse. You might say that the greed factor becomes more prevalent.
As the upturn ages, people become more confident and think that the expansion will last indefinitely. (This has a similar ring to peoples’ attitudes towards real estate today.) Business people take on more debt to leverage their profit margins. The consumer will also be increasing their debt burdens to finance their growing consumption habit. This increase confidence of consumers is also reflected in their disregard of saving. Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.
Top Ten Business Valuation Questions For Business Appraisers
Having performed business valuations for a variety of purposes, I have been asked a number of questions from clients. The following top ten business valuation questions have been compiled in an effort to briefly address some of the most frequent concerns clients have regarding a business appraisal.
1. What approaches do you consider in valuing the business?
Income Approach-The Income Approach derives an indication of value based on the sum of the present value of expected economic benefits associated with the company. Under the Income Approach, the appraiser may select a multi-period discounted future income method or a single period capitalization method.
