There’s an old folk story about two men who had a contest to see who could cut the most firewood in a day. One of the men, an energetic young man, was confident he would be the winner. Much to his surprise, his opponent, a wise old man, bested him. “How did you beat me? I saw you taking all those breaks in the shade of that tree!” the young man exclaimed. The wise old man chuckled and said, “What breaks? I was sharpening my axe!”
Summer is when we sharpen our axes. For the valuation team, the year typically gets off to a busy start with ESOP clients looking for an updated share price. Additionally, many business owners began making decisions—buying or selling companies and planning for ownership transitions—in the spring after reviewing financial results for the prior year.
By summer, this activity is winding down. Things never quite get slow, but in the summertime, we make time to set ourselves up for sustainability during the busy times. Our summers are full of training analysts, getting acquainted with future talent through our intern program, refining templates, and exploring new ways to help our clients create, grow, and protect value.
We also spend a little more time digesting economic trends and forecasts and considering what implications these variables may have on business value.
We track trends in several databases of private company transactions, among them GF Data, Capital IQ, DealStats, and BIZCOMPS. As presented below, transaction volume normalized following a decrease in interest rates. Transaction volume peaked in the last quarter of 2021.1
Don’t get too fixated on the multiples in this chart as an indicator of value for your company. Look at the trends. Multiples vary dramatically from industry to industry and business to business. If you are interested in exploring value drivers for your company, read this recent article.
1Used with permission from GF Data Resources, LLC. All recipients of this Quarterly Valuation Update agree to be subject to and comply with GF Data’s Terms of Use.
The value of privately held companies typically isn’t as volatile as share prices for public companies. However, activity in the stock market provides general guidance that is often much timelier than data available for private companies.
There are a few indexes we keep an eye on. Although the S&P 500 is dominated by a handful of large tech stocks, it is generally considered the go-to benchmark for stock market performance. The Russell Midcap Index cuts out the largest 200 companies in the Russell 1000 Index, keeping 800 US companies with market capitalizations between $2 billion and $10 billion. The Dow Jones Industrial Average is comprised of 30 “blue chip” US stocks that may be similar to many private companies.
After rebounding from a decline in November and December of 2023, stock prices have continued to rise throughout the first quarter of 2024.
Many drivers of business value can be influenced or controlled by the decisions of the business’s management team, including: product diversification, brand recognition, and employee retention. Other drivers are outside of management’s control, such as inflation and unemployment rates. Below is a table summarizing several key drivers of the US economy.2
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2 Source: Federal Reserve Economic Data, available at https://fred.stlouisfed.org/.
As many of our clients are located in New England, we’ve included a summary below of some of the key economic drivers that affect businesses in the Northeast. If your business is headquartered outside of New England, reach out to us for an economic analysis specific to your market area.
Economic activity
Business activity expanded at a modest pace in recent weeks, prices rose slightly, and employment was flat overall. Convention and tourism activity grew at a robust pace, but retail sales increased only modestly. Manufacturers reported slight revenue growth, while software and IT services firms had flat revenues recently despite strong year-over-year growth in sales. Residential home sales increased by moderate margins from a year earlier, the first such increase in over two years. Activity in the commercial real estate sector—including construction—picked up slightly, on balance. The sector’s outlook also improved a bit, but the risk of financial distress for large office buildings remained elevated. In other sectors, contacts ranged from cautiously optimistic to bullish concerning the outlook, largely in line with the strength of their own recent results.
Labor markets
Employment was unchanged overall, but labor market conditions were mixed. One large retailer enacted substantial layoffs in a bid to boost profitability, but no other contacts (in any sector) reported layoffs. Restaurant employment increased modestly on the strength of sustained demand and increased supply. Tourism-related employment in greater Boston was flat as firms struggled to reach desired staffing levels. Employers on Cape Cod also faced challenges filling jobs as rising housing costs priced more workers out of the Cape. Software and IT employment increased slightly, and manufacturing employment was flat or down slightly where there was attrition. Wages increased at a moderate pace on average. Contacts did not expect major changes in labor market conditions moving forward, although tourism contacts hoped that an upcoming career fair would help attract more workers for the busy summer season.
Prices
Prices increased only slightly overall. Retailers reported modest input price increases, and one remarked that recent shipping disruptions overseas had not yet affected its suppliers. Hotel room rates in greater Boston were stable recently, net of seasonal factors, and were up moderately from a year earlier, marking a notably slower pace of growth compared with 2023. Nightly room rates on Cape Cod were flat compared with last year. Software and IT services prices were stable. Manufacturers mostly held prices steady, but some reduced their output prices (either slightly or moderately) in response to declining input prices; those experiencing cost increases, by contrast, reported that they had raised prices moderately. For the most part, the outlook called for slow further price growth moving forward. However, one manufacturing contact, having held prices steady over an extended period, was considering a significant price increase to compensate for accumulated cost pressures.
Retail and tourism
First District5 retail and tourism contacts reported a moderate upswing in sales in the first quarter of 2024 from late 2023, net of seasonal factors. An online retailer boosted its market share and experienced modest revenue growth despite sluggish industrywide performance. Airline passenger traffic through Boston increased at an above-average pace in recent months, with total passengers now exceeding pre-pandemic levels. Domestic travel remained below pre-pandemic levels because of the incomplete recovery of business travel, but growth in international travel more than compensated. Hotel occupancy in greater Boston increased at a strong pace, exceeding seasonal norms, fueled in part by robust convention activity and sporting events. On Cape Cod, retailers and hoteliers said revenues were on par with one year earlier, a modest improvement from the previous report. The outlook for tourism and convention activity in 2024 remained very bullish, and Cape Cod hotel bookings for the remainder of the year looked on track to match those from 2023. In contrast, retailers were only cautiously optimistic.
5 The Federal Reserve System’s First District includes Connecticut (excluding Fairfield County), Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont.
Manufacturing and related services
Manufacturing revenues were about flat on balance, with half of contacts reporting moderate gains in sales over the cycle and the other half experiencing moderate losses. Capital expenditures were mostly unchanged but on balance exceeded typical levels, as two firms were in the process of expanding or upgrading their plants. Contacts were uniformly optimistic for the remainder of 2024, projecting steady to moderately higher sales moving forward; in one case, however, that still meant that total sales in 2024 would fall short of their 2023 levels. The positive forecasts were based largely on firms’ own recent demand trends, but one contact cited the prospects of productivity gains from AI and expected cuts in the federal funds rate as additional sources of optimism.
IT and software services
Contacts in IT and software services said that demand and revenues were mostly stable in recent months. On a year-over-year basis, revenues increased by moderate to large margins for all firms. Those latter growth rates were about on par with those of the previous quarter and exceeded expectations in one case. Furthermore, the growth was attributed to factors that had boosted real demand, such as the transition to subscription-based business models. Capital and technology spending was unchanged, and no future changes were anticipated. Contacts expected demand to hold fairly steady at strong levels in the next quarter. One contact noted that the time required to close deals had increased of late, but the implications for their revenues were not yet clear.
Commercial real estate
Commercial real estate activity in the First District increased slightly on balance since February. Industrial leasing activity slowed a bit due to a lack of inventory, and industrial rents faced slight upward pressure. In the office market, leasing activity held mostly steady at a slow pace, but one Boston contact detected a modest increase in tenant demand; office rents were mostly stable but fell slightly for lower-quality spaces. Leasing activity strengthened modestly for retail properties, with deals concentrated in restaurant- and grocery-anchored centers. Construction activity picked up a bit, primarily in the industrial market but also for retail and hospitality projects. Contacts noted an uptick in refinancing activity for office properties with maturing loans, but borrowers often had to add equity. The investment sales market was nonetheless still “frozen,” as investors waited for interest rates to come down, and large banks remained on the side lines. The outlook improved modestly, as contacts expected leasing activity to either hold steady or increase by late 2024, including for small-to-medium sized office buildings. Contacts remained concerned that certain office properties faced elevated foreclosure risks.
Residential real estate
For the first time in over two years, residential home sales increased on a year-over-year basis in all First District states that were contacted (Connecticut furnished no data). Closed single-family sales increased at a moderate pace on average (from February 2023 through February 2024) and were led by robust gains in Vermont, Maine, and Rhode Island. Condominium sales fared even better than single-family sales over the same period, with strong overall growth and very large increases in those same three states. Massachusetts posted only modest increases in home sales, although greater Boston had above-average results within the state. Contacts attributed the stronger sales to a combination of recent declines in mortgage rates and increases in property listings but emphasized that inventories remain well below desired levels. Home prices increased at a strong pace from one year earlier, similar to what was last reported. Contacts were optimistic for a strong spring buying season, provided the tight inventory situation showed further improvement.
- To learn more about ESOPs, here is a brief overview of ESOPs we put together.
- Interested in learning more about business valuations? Pick up a copy of our book, A Field Guide to Business Valuation.
- Today’s business reading, suggested by analyst José Calvo, is Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne.
Where to find us
Cameron Scott will be attending the 2024 FOX Family Office & Wealth Advisor Forum in Chicago on July 15th through July 17th.
Seth Webber and Casey Karlsen will be presenting a webinar titled “Exit Planning: Helping Business Owners Increase Value and Liquidity” through Business Valuation Resources on August 6th at 1 pm ET.
Meridith Byrne and Seth Webber will be attending the New England Chapter of The ESOP Association’s Fall Conference in Springfield, Massachusetts on October 15th and October 16th.
Casey Karlsen will be presenting a session titled “Exit Planning and Value Acceleration” at the Maine Tax Forum on November 7th.
Interested in meeting the team? Please reach out to us. We would love to connect.
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