During our February CEO Peer Network Meeting, we had the pleasure of welcoming guest speaker Ken Serwinski to our discussion on valuation. He posed a key question: “Valuation projection challenges...what should drive your thought process?” Ken brought his expertise spanning over 30 years in the ESOP space. His insights provided a valuable framework for understanding the factors that will shape business valuations in the coming year.
As we move into 2025, valuation professionals, investors, and business owners are all asking the same question: What forces will shape business valuations in the coming year? Many experts predicted a strong year, but with economic and geopolitical uncertainty in the mix, it’s crucial to assess the factors that could drive—or disrupt—valuations.
The Washington Factor: Policy and Economic Shifts
Washington plays a pivotal role in shaping the economic landscape. Key areas to watch include:
- Interest Rates: The Federal Reserve’s stance on interest rates will continue to influence valuations. A decline in rates could stimulate deal-making and asset appreciation, while persistently high rates may suppress growth.
- Regulatory and Tax Policies: Changes in corporate tax rates, capital gains treatment, and industry-specific regulations could affect profitability and investor sentiment, particularly for ESOP companies since they benefit from specific tax advantages.
- Government Spending and Debt: The federal budget, infrastructure investments, and debt levels may influence economic stability and liquidity, affecting ESOP structures that rely on financial predictability.
The M&A Market: Opportunities or Stagnation?
The mergers and acquisition (M&A) landscape is always a crucial indicator of valuation trends. A robust M&A market suggests confidence, liquidity, and growth potential, while a slowdown could indicate caution and a reduced appetite for risk. Factors influencing M&A activity in 2025 include:
- Access to financing and lending conditions, which are particularly relevant for ESOP companies looking to fund buyouts or expansions.
- Private equity activity.
- Strategic consolidations in key industries such as technology, healthcare, and energy, which may affect employee-owned businesses navigating competition or acquisition offers.
Global Uncertainty: Tariffs, War, and Trade Disruptions
The geopolitical climate remains uncertain, and global events can have profound effects on business valuations. Consider:
- Trade Policies and Tariffs: Changes in international trade agreements or tariff implementations can affect supply chains, costs, and overall business performance.
- Conflict and Stability: Wars, political tensions, and peace agreements shape global markets, energy prices, and investment sentiment.
- Inflation and Commodity Prices: Fluctuations in raw material costs, supply chains, energy prices, and currency valuations all play a role in business profitability and, consequently, valuation calculations.
Managing Valuation Amid Chaos: Key Thought Processes
Given the dynamic nature of 2025, a structured approach to valuation is essential. Consider these guiding principles:
- Macroeconomic Indicators Matter: Inflation trends, interest rates, and GDP growth should inform assumptions about future earnings and discount rates.
- Industry-Specific Factors: Some sectors may thrive amid uncertainty, while others struggle. Tech and healthcare often show resilience, while energy and manufacturing may be more volatile.
- Scenario Planning: Given unpredictable variables, running multiple valuation scenarios can provide a more comprehensive view of potential outcomes.
- Market Sentiment and Investor Behavior: Public market trends, investor confidence, and capital flow trends should be integrated into valuation models.
- Employee Ownership Considerations: For ESOPs, factors such as employee retention, internal stock valuations, and long-term sustainability of the plan must be weighed carefully in valuation models.
Final Thoughts
2025 is shaping up to be another complex year for valuations, with rippling effects on subsequent years. While many experts remain optimistic, factors such as interest rates, M&A activity, global instability, and economic policies from Washington all play a role in determining whether businesses gain or lose value. For employee-owned companies, understanding how these forces affect ESOP structures, financing, and stock valuation is crucial. Staying informed, adaptable, and strategic will be key to navigating valuation challenges in the years ahead.
We are looking forward to seeing you at the conference in April to learn, discuss, and strategize together!