Business Valuation

Article Dean Dorton

As we step into the last stretch of 2023, it’s crucial to keep a finger on the economic pulse. An insightful way to grasp the state of the U.S. economy is through the U.S. Leading Economic Index (LEI), a pivotal tool designed to forecast future economic shifts. The LEI is essentially a composite index, a concoction of various economic indicators, offering a glimpse into the potential trajectory of the economy.

According to BVR’s Economic Outlook Update for August 2023, the LEI has continuously fallen for almost one and a half years. This decline raises significant flags regarding the economy’s future growth and may indicate a possible recession.

Several contributing factors played a role in this decline:

  1. High interest rates and tight credit conditions
  2. A weaker New Orders Index
  3. A drop in consumer outlook regarding business conditions

High Interest Rates

During its July meeting, the Federal Open Market Committee (FOMC) opted to increase the target range for the federal funds rate by 25 basis points, establishing a new range of 5.25% to 5.50%. This decision reflects the ongoing efforts to navigate the economic currents and maintain a balance. However, it is worth noting that the FOMC decided not to increase rates at its September meeting, but indicated the possibility of further hikes before the end of the year remains.

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Weak Manufacturing Orders

The New Orders Index is a significant economic indicator used to assess changes in orders placed with manufacturers. It is a component of various purchasing managers’ indices (PMIs) and is commonly associated with the manufacturing sector. An increase in new orders often signifies growing demand, economic expansion, and potentially higher production levels in the manufacturing sector.

According to BVR, of the six largest manufacturing industries, only three showed signs of growth in August (transportation equipment; food & beverage; and petroleum and coal products). Only one of the other 18 manufacturing industries reported new order growth in August while nine reported a decline.

Lower Consumer Confidence

Consumer sentiment, an integral aspect of economic health, took a noticeable hit in August. The Consumer Confidence Index and the Thomson Reuters/University of Michigan’s Consumer Sentiment Index witnessed a substantial decrease. This decrease is indicative of deteriorating assessments of current conditions and a cautious outlook toward the short-term economic future.

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The Positives

While the economic landscape may seem challenging, there are still positive signs. Retail sales increased in August by 187,000, showcasing consumer spending strength, a crucial component of economic growth. Moreover, job growth was witnessed, albeit with a slight increase in the unemployment rate. It is worth noting that job growth was lower in September at 170,000 jobs added.

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Mixed Signals

In summary, August 2023 has presented a mixed bag of economic updates. The U.S. Leading Economic Index decline raises concerns about potential economic contraction, urging stakeholders to navigate cautiously. Policymakers, economists, investors, and small business owners are keeping a watchful eye on these indicators, recognizing the critical need for informed decisions in these dynamic economic times.

Understanding the intricacies of these economic indicators is essential for anyone seeking to comprehend the broader economic landscape. The U.S. Leading Economic Index serves as a valuable tool in this endeavor, offering insights into the future trajectory of the economy. As we progress through the remainder of the year, staying informed and adapting to these economic shifts will be key to successfully weathering the challenges and capitalizing on the opportunities that lie ahead.

Part of the contents of the economic outlook section of this valuation report are quoted from the Economic Outlook Update™ August 2023 published by Business Valuation Resources, LLC, © 2023, reprinted with permission. The editors and Business Valuation Resources, LLC, while considering the contents to be accurate as of the date of publication of the Update, take no responsibility for the information contained therein. Relation of this information to this valuation engagement is the sole responsibility of the author of this valuation report.

Article Dean Dorton

Recently, Dean Dorton hosted its 2020 Forensic Accounting for Attorneys webinar. The purpose of the event was to teach pertinent fundamental tools and practical tips that attorneys can use to help their clients achieve favorable financial outcomes in a variety of settings. The webinar covered a variety of topics including the impacts of COVID-19 on business valuation, IT management and cybersecurity, and a panel discussion on best practices for working with financial experts.

As the year 2020 begins to wind down, here are a few takeaways for law firms planning for 2021 and beyond:

  1. COVID-19 and Business Valuation – Economic and Industry Considerations – COVID-19 had a clear impact on the economy which ultimately affects business valuation. Consumers have reacted to COVID-19 and related shutdowns with decreased activity and more online purchasing. This consumer behavior has caused many businesses to try to adjust to new patterns. National analysts are projecting it may take a several years to fully recover from the coronavirus pandemic and related shutdowns. However, that impact is not universally downward. Many industries such as groceries and technology have boomed while others such as restaurants, hospitality, and entertainment have struggled. Careful consideration of the facts and circumstances of each business are required as many rules of thumb have been upended and market prices quickly become outdated in business valuation calculations. Continue reading to find out what this means for business valuation calculations and the business valuation income approach.
  1. COVID-19 and Business Valuation – Income Approach to Valuation Considerations – Prior to COVID-19, many valuations under the income approach were completed using capitalized earnings (one period) models. Due to the nature of the economic and industry impacts discussed above, valuation experts have to consider the need to address changes in Company cash flows that might occur over the next few years. Where historical results were stable and could be used as an indicator of the future, COVID-19 has changed that assumption for most businesses. The past may not be as strong of an indicator of future cash flows. This has created the need for the use of a discounted cash flow model, which relies on company projections to address changes in future cash flows over a multiple year analysis. Some valuation professionals are creating multiple scenarios, weighted by probabilities, when forecasting future cash flows. This allows the valuation analyst to consider the different impacts the virus may have on the economy and the specific company in the future. We recommend working with a certified business valuation professional in order to provide your clients with the most accurate data.
  1. IT Management and Cybersecurity – IT management and cybersecurity are crucial to keeping your law firm running but have you done enough? The quickly evolving industry of data protection makes it unwise to assume that your data and information (both your law firm’s information and your client’s information) are protected from a cyber-attack. As technology continues to advance at a rapid pace, it is ever more important for businesses to secure their sensitive information. Standards are quickly becoming stricter with client expectations rising and many states adopting strict reporting standards, especially for law firms working with those in an insurance-related capacity. It is pertinent to make cybersecurity a top priority. Doing so does not mean you have to spend six-figures on cybersecurity. Prioritizing budget money for cybersecurity means utilizing tools like Dean Dorton’s cybersecurity assessment and scorecard to determine where you have cyber security weaknesses. This will help you identify your greatest areas of risk, and allow you best address them within your budget and timeframe.
  1. Expert Testimony – Three of our Dean Dorton expert witnesses, Elizabeth Woodward, John Herring, and Missy DeArk, have been busy throughout the year despite the impacts of COVID-19 on the legal system. The rapid change to virtual communication and testimony led to some advantages, including convenience and decreased travel time/expenses. Disadvantages noted by our team members include potentially longer trial times, exhibit presentation challenges, and issues with technology not working. Some tips for using expert witnesses in virtual testimony moving forward based on our team members’ experiences include:
  • Having a practice session between the attorney and the expert witness
  • Familiarizing yourselves with various video conferencing systems such as the popular Zoom and Cisco Webex platforms
  • Investing in the necessary tools to deliver a high quality experience

As your law firm continues its planning for 2021, it is worth your time to consider the items listed above and how they will impact your clients and your firm.

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