The U.S. annual inflation rate jumped to 8.5% in March 2022, the largest increase since December 1981. This was caused by global supply chain bottlenecks, high consumer demand, and the war in Ukraine. Sectors impacted include:

  • Energy prices surged 32% (including gasoline’s increase of 48%)

  • Food prices increased 8.8%

  • New vehicles jumped 12.5%

When considering inflation’s influence on business valuations, there are several variables impacted. Here’s a quick review of the impact of inflation on different valuation approaches:


Asset approach

  • This approach is used when financial results are consistently poor, or a real estate company/holding company is being valued.

  • As current market values are used to value assets, high inflation causes higher market (replacement) values, and therefore a higher business valuation amount.

Market approach

  • This uses past sales data of comparable companies (“comps”) and applies an average price multiple to the subject company to compute a valuation amount.

  • This approach may over-inflate a business valuation as it mainly includes data from the past 5 years (which is prior to the onset of high inflation).

Income approach

  • This is used when the subject company’s cash flows can be reasonably forecasted.

  • In this approach, substantial inflation increases the discount rate, the cost of goods sold, and operating expenses – each impact lowers the business valuation amount. Also, although the subject company may increase its sales prices to offset these losses, rarely can prices be raised to a point to completely offset all losses.

In summary, when high inflation is factored into a business valuation, the valuation amount is generally lower. Finally, who can benefit from a lower business value?

  • Gift and estate tax transfers - more shares can be transferred.

  • Divorce - for the party wanting to show a lesser value.

  • Buyer of a business - wants to buy a business at a lesser amount.

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