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Business Appraisals & Economic Outlook

01-15-2015

Considering the Economy and Economic Resources in the Appraisal of a Business

In every valuation report, a section devoted to the economy is a required piece of the puzzle.  According to IRS Revenue Ruling 59–60, an IRS treatise on the valuation of closely held business interests, “the economic outlook in general and the condition and outlook of the specific industry in particular” should be considered.  That includes an understanding of the regional and national economy.  The benefits are several, as the economic analysis can be used to assess the future performance of the appraisal subject and also help in assessing risk exposure to a specific industry.

While the impact of the national economy might not appear to have consequence to a small company with regional sales, these national statistics can indicate the beginning or end of a recessionary period, and/or spot trends in financial markets.  Depending on the industry, those economic indicators may point to industry growth or contraction.

National economic statistics, such as interest rate changes, can affect the pricing of consumer goods and supplies while changes in the gross domestic product (defined as the total value of goods produced and services provided in a country during one year) can provide information on recessionary changes.  By example, if the subject company in a valuation were a contractor, national economic information, such as housing starts and building permits, could impact the projection of future construction projects.

While there are national economic summaries that can be purchased for use in valuation reports, U.S. government websites also offer reference material to enhance this analysis.  The links shown below access the websites, which provide free current and historic information on the national economy, as well as industry-specific data.

Beige Book—Summary of Commentary on Current Economic Conditions by Federal Reserve District—Commonly known as the Beige Book, this report is published eight times per year.  Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts and other sources.  The Beige Book summarizes this information by District and sector.  An overall summary of the 12 District reports is prepared by a designated Federal Reserve Bank on a rotating basis. See it here.

U.S. Department of Commerce, Bureau of Economic Analysis (BEA)—The BEA website provides national, international, regional and industry information.  BEA’s national economic statistics provide a comprehensive view of U.S. production, consumption, investment, exports and imports, and income and saving. See it here.

Regional Economic Information—Pennsylvania Department of Labor & Industry, Monthly News Releases—The monthly news releases contain an analysis of the current economic conditions for Pennsylvania, its 14 Metropolitan Statistical Areas (MSA), 21 Micropolitan Statistical Areas (mSA), as well as 15 Small Labor Market Areas (LMA).  See it here.

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