Best practices for managing valuations in volatile markets

Looking towards 2025, many of these dynamics seem to be normalising, signalling significant upside potential for M&A. For advisors, understanding market trends is essential to assess the potential risks and opportunities that influence a company’s valuation and to successfully close a transaction.

Most investment bankers are familiar with the various methods of valuing a company –comparable companies (Comps), precedent transactions, discounted cash flow (DCF), and sum of the parts. Not considering factors outside of the business affecting valuation, every method has its time and place. For example, using a DCF to value a startup software business may not yield the most accurate results, as it are less likely to correctly project the financial results five years into the future, let alone come up with historical financial data on which to base those projections. A DCF also does not account for market trends, nor take into consideration the company’s competitive positioning. Using a blend of methods, and acknowledging both the strengths and limitations of a DCF, advisors can make more precise decisions when it comes to valuing a software startup.

The same approach should be taken into consideration when valuing any type of business in a volatile market. There is no right way to determine a company’s valuation; rather, all approaches should be weighed in each appropriate case. Scenario analysis should be applied to develop different valuation scenarios (base, bull, and bear cases) to reflect possible market outcomes. Sensitivity analyses will also help examine how changes in key inputs, like revenue growth during a recession, or cost of capital in a high-interest rate environment, impact valuations. Most importantly, the focus on fundamental drivers, like cash flows, profitability, competitive positioning, and balance sheet strength, will help ground valuations in a volatile market.

However, applying all of these principles to valuation can get an advisor only so far. Knowing how to value a business is one thing, but effectively communicating the nuances of market volatility as it applies to a client’s valuation expectation is another. Transparent communication during times of market uncertainty is of utmost importance. Knowing when to wait, or when to proceed with a transaction should be discussed. Understanding a client’s expectations, especially in less than ideal market conditions, can determine a successful (or unsuccessful) outcome for a client. 

To conclude, understanding market trends and the appropriate times to consider various valuation methods are key factors in navigating the complexities of company valuations, especially in volatile markets. By analysing and understanding these trends, businesses can gain valuable insights into their own valuation and make well-informed strategic decisions. Market volatility often results in substantial fluctuations in company valuations, underscoring the importance of adaptability and strategic foresight. By staying informed and proactive, businesses can mitigate potential risks and capitalise on opportunities that arise from evolving market dynamics.

---

Chris Fieschko, Managing Director at Hyde Park Capital, has 9+ years in investment banking experience. He’s advised on 25+ deals from US 20 million to US 1 billion +, with roles at Marlin & Associates, Raymond James, and Jefferies. A Cornell grad, he enjoys golf, motorsports, and cooking.