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Do market swings affect the value of closely held businesses?

Apr 06, 2020

By Lisa M. Cribben and Holly C. Kuffel

The recent COVID-19 outbreak has had a devastating impact on the stock market.

The S&P 500 dropped in value about 34% from February to March before rebounding to its current level of about 25% below the peak. With that drop in the market for public stocks, business owners of closely held companies may be wondering how that correlates to their company’s value.

S&P 500 Price Index graph

Source: S&P Capital IQ, Retrieved from www.capitaliq.com

The Answer: The correlation is not as high as you may think.

Although the S&P 500 companies dropped 34% overall in one month and virtually every public stock decreased in value, the value of a closely-held/private business may not have dropped at all and may have even increased.  

While the stock market and the publicly traded companies traded on the stock exchanges can have huge swings in the average price to earnings multiples from year to year, the actual change in multiples for a closely held/private company, typically does not see the same wild swings and is not directly impacted by the swings in the stock market.

Since its inception, the stock market indices (e.g. Nasdaq, S&P, Dow) have been notoriously volatile. The erratic and sometimes irrational movement of the stock market indices is driven by changes in the underlying stock prices of companies, which are impacted by daily investment supply and demand, and investor perception.

Investor perception in publicly traded stocks is impacted by daily news cycles, disclosures required by quarterly and annual reporting, as well as institutional trading nuances.

These elements don’t exist in private markets in the same way, which is why you don’t see the same volatility driven by hopes, as well as fears for future earnings.

Conversely, private markets are more focused on trailing 12 months and current run rate with the buyer having more control and often confidence in their ability to influence future performance.

The following table shows the historical average price to earnings (P/E) ratios for the S&P 500. The table shows a number of spikes and contractions in the P/E ratios over the past 90 years. Some fluctuations have coincided with the economic environment, but not all have mirrored trends in the economy. The largest spike reflects the stock market crash in 2008, which resulted in skewed P/E ratios based on abnormally low earnings. Prior to 2008, the largest spike was precipitated by the popularity of the 401(k) and the tech bubble later in the 1990s.

Past 90 years:

Average P/E Ratio Based on S&P 500

Source: Robert Shiller and his book “Irrational Exuberance”, Retrieved from www.multpl.com

Past 10 years:

Average P/E Ratio Based on S&P 500 graph

The multiples for closely held/private businesses have been less volatile than those of public stocks as evidenced by transaction data compiled for private companies. The average enterprise value to EBITDA multiple paid in transactions with deal values up to $100 million over the past 13 years is shown below:

US M&A Multiples (Enterprise Value <$100M) graph

Source: Mufson Howe Hunter’s M&A Update, Retrieved from https://cdn.thomasnet.com/ccp/30847668/279068.pdf

As the charts above illustrate, movement of the private company transaction multiples is not as volatile as the stock market, but it still fluctuates. This fluctuation in multiples occurring in both publicly traded and privately held companies is driven by future expected earnings, financing availability, supply/demand and risk and uncertainty relative to future earnings. As each of these factors increases or decreases, there is a direct impact, positive or negative, on the value of the business.

Future expected earnings

Future expected earnings is the first and foremost factor that drives business value.

Although historical earnings are normally considered in a business valuation, future earnings are what drive multiples and business value. Perception of decreased earnings drove multiples down in 2010 through 2013. As earnings started to stabilize in 2014 and growth expectations increased, multiples increased.

Although we have experienced growth over the past 10 years, the future is not currently as certain.

Prior to COVID-19, most economic indicators were strong and the general expectation is that a recovery will occur after the COVID-19 contraction. While  uncertainty in the future could drive down multiples for private company valuations, multiples should stabilize as the economic recovery occurs.

In either case, they won’t be as volatile as the public markets as appraisers and buyers of private companies often take a longer-term view than public-markets, which reprice on a daily basis.

Financing available

During the Great Recession, there was extreme credit tightening that resulted in the average amount of financing available per deal decreasing and an increasing requirement for higher equity contributions or lower acquisition price.

Without high growth expectations, buyers were unable or unwilling to put more equity in acquisitions. This essentially decreased the price and multiple paid in order to maintain the same investor return.

With the massive stimulus and focus by the U.S. Treasury to maintain liquidity, it remains to be seen whether financing will be affected by the COVID-19 slow down. With low interest rates and increased incentives for financing, now would be the time to lock in financing if there is a transaction anticipated.


The number of potential buyers also impacts the multiples. As the supply of buyers increases, so does the value created by competitive bidding.

During the Great Recession and the tightening of credit markets, the ability of virtually all buyers to close deals was diminished. Additionally, the high unemployment rates decreased the number of individual buyers capable of buying businesses.

It remains to be seen what the current climate will yield. There is still a lot of capital available to be deployed. Prior to COVID-19, private markets were generally referred to as a seller’s market, which means there were more buyers than sellers.

If the number of long-term buyers does decrease to a point where sellers have more difficulty finding buyers, transaction multiples will likely decrease along with the value of private companies.  

Risk/uncertainty relative to future earnings

When there is uncertainty about the future or a higher risk that future results will not be achieved, expectations of the future are lowered and so is the value of a business.

Before COVID-19 hit, buyers were generally considered optimistic about the future. Consumer confidence continued to be at record highs, even with some signs of potential recession down the road.

However, with COVID-19, uncertainty about the future was created. Risk and uncertainty affect future growth expectations and have an impact on the multiple paid and the value of the business at that point in time.

Preserving value

Even though the value of a private company does not fluctuate with the same volatility as public markets, they do fluctuate alongside business profits, business risks, financing markets and overall supply and demand. 

Many businesses are coming off of record profits but the uncertainty of the future may drive the multiples on those record profits down. Appraisers and buyers of businesses will generally take the current situation into consideration that could impact the value of the business.  

Preparation is the key to success. The key to preparing and preserving your company’s value is by working to maximize the company’s sustainable long-term future profits and mitigate risk to the extent possible. 

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