How will soaring inflation impact business valuations?

Valuing businesses since the onset of the pandemic has been more challenging than ever before. Previously historic trading results tended to be relatively consistent and the business valuer would typically place reliance on the historic financial accounts in providing a valuation which at its simplest applies a multiple to the estimated future maintainable earnings.

In undertaking valuations amid the pandemic we have needed to look at both the current impact of the pandemic on the business and also the future trading prospects. It was imperative to look at up to date trading and not just the historic published accounts. Was the impact temporary, perhaps due to the lockdown or would it persist?

Some businesses eg garden centres, online retailers, electronics, second hand car sales and certain medical supplies have seen record trading whilst others such as the hospitality and events sector, retailers of business wear, high street shops etc have suffered substantial trading losses.

In real life sales of businesses we are seeing some exceptionally high multiples in those businesses which have performed well in the pandemic.

Escalating inflation adds another element of volatility to the challenges facing businesses and thus another factor to be considered by the business valuer. Can the increase in costs be recovered by increase in sales prices or will the margin be reduced?