Does Stock Market Volatility Affect Business Sale Prices?
Over the past few years, there has been a clear correlation between the performance of publicly traded stocks and the median sales price of private business sales. But does correlation imply causation?
After the brief initial shock from the Covid-19 lockdowns, the stock market rallied. In 2021 the S&P 500 gained almost 30%, and at the same time, median sales prices in the private business for sale market – a smaller market that generally sees far less volatility - rose around 10%.
Economics 101 says that asset values in two competing markets should move inversely of one another. In as much as investors can choose where to deploy capital based on expected returns, a favorable outlook on the public stock market should reduce demand (and therefore prices) in the private business for sale market, and vice versa. Recent behavior, though, seems to follow the opposite pattern.
The most likely reason for the tight correlation of the two is a common driver of prices – monetary policy. The Fed’s response to the Covid-19 pandemic was to pump money into the economy in a variety of ways, from easing the federal funds rate to near zero, and buying hundreds of billions of dollars’ worth of Treasury securities, to sending stimulus checks and providing, then forgiving, PPP loans.
All of this available money went into both public securities and private equity, driving asset prices everywhere to all-time highs.
Now, as the Fed restricts money supply to get a handle on inflation, the business for sale market is feeling pressure as business buyers struggle to raise enough money to meet business owners’ new expectations. Similarly, the stock market’s rise has been tamped back down, though both remain comfortably above pre-pandemic price levels.
Whether either or both markets will settle around this new normal is yet to be seen, and most investment professionals will tell you trying to time the market is a profitless endeavor.
If you are thinking about selling your business, or buying one, create your free BizBuySell account to keep tabs on the business for sale market, and start your purchase or sale when your timing is right.