Why the Stock Market's Ascent Could Drive Up Business Sale Prices
A record number is just that--a number.
So it was when the Dow Jones Industrials notched 17,000 on a short day of trading Thursday, before the long Fourth of July weekend. The record level of the index, which reflects the combined share price of a basket of 30 blue chip stocks, was a response to strong jobs data, which showed that the unemployment rate had fallen to a six-year low at 6.1 percent.
But I wanted to make sure I wasn't missing anything as the index settled for a second day above 17,000 on Monday. So I chatted with the valuation experts over at Capstone Valuation Services, of New York, to see what they thought about the record index level. Capstone is in the business of valuing private companies, and works closely with businesses and private equity firms that buy and sell businesses.
"Every time you hear about a benchmark like this, people can either say things are going great, while others might say it can't keep going like this," says Bruce Bingham, executive director of Capstone.
For example, some market watchers might say the new high is a result of investor faith in the Federal Reserve's ongoing economic policies, with its low interest rates and its continuation of slow and steady monthly bond buybacks. Others might see the 17,000 mark as a trigger to sell stocks, Bingham says.
The lesson for small business owners is to carry on, although the stock market's latest highs could increase the valuation expectations of business buyers or sellers.
Nathan Klatt, a managing director at Capstone, said it might cause people seeking to sell a business--such as private equity owners--to demand higher valuations, even if company earnings are flat or only slightly increasing.
"We feel like there is room for expansion of [sales] multiples," says Nathan Klatt, a managing director of Capstone. "The expectations for the economy are higher."
But for Charlie Stryker, also a managing partner at Capstone, a more imporant benchmark to watch is the S&P 500 index, which represents a broader basket of stocks (500 companies, in fact, as its name suggests). It, too, is in spitting distance of a record--the 2,000 mark. On Monday, the S&P 500 closed at 1,977.
"The Dow is just a sound bite Index," Stryker says. "But if the S&P cracks 2000, it will be more momentous."