b'Photo by Adam Nir on UnsplashBUSINESS MATTERS: COMPARISON OF DISCOUNTED CASHFLOW ASSUMPTIONS OVER 40 YEARSBUSINESSPicking Up Our HeadsBY BOB SHAW // INDUSTRY CONSULTANTR ecently,Ivisitedageneralmanagerassassinations. The guns and butter and haveLets look at some big potential long-term changes. who was in the best mood possibleit all economic policies created stagfl ation,As they say, history doesnt repeat itself, but it sure eventhoughherbusinesshadbigwhichthencollidedwiththeIranianOildoes rhyme.challenges. Why was she so happy? She wasShock to create two decades of high infl ation cruisingagainandreunitedwithhercrew,and interest rates.Flashing forward to today,WHAT ABOUT BUSINESS whichmadeanythingbearable.Hopefully,wesimilarlyponderwhathaspermanentlyVALUATIONS? (HINT: THINK well get some relief from the worst hiringchanged in our world. INTEREST RATES)crunchevertoscrambleforalltheacornsWe wonder what our business is worth and what is possibleinQ4.Thenitwillbeourfi I fervently believe that capitalism, despite itsthe proper benchmark: is it 2019 (or is that beatenrst chance, in over a year and a half, to catchfl down) or is it todays high stock markets? For myaws, has created the most benefi t for the most our breath.peopleintheshortesttime.Pre-pandemic,fi twenty years in this industry, the old saw wasrst hundreds of million in Asia were lifted outthat youd be a buyer at 5x cashfl ow and a seller at This has been the most traumatic and chaoticof poverty in the last generation. However,7x. With that rule of thumb, we once felt like a star period since 1968, which was an enormousour capital system is in peril and under shockselling at 7.25x cashfl ow; seven years later that same infl ectionpoint:theVietnamWarreachedfrom many forces. Already it seems as thoughcompany traded at 7.75x, then another seven years atippingpointaftertheTetOff ensive,we have all that we can handle. Just remember9x. Thats enormous incremental value created for withwidespreadracialunrest,andevenwhen the next change hurtles your way, soessentially the same boats. This happened due to does opportunity.many reasons, but one big driver was record-low interest rates. Now, apply these discount rates (WACC) to $100k of cash fl for 9 years with a sale price of $3Mow in year 10. Using the 1980s assumptions, the net attention to detail present value of those cash fl ows is $1.1M; in 2020, its more than double at $2.3M. Hence, valuations have changed signifi cantly over the years driven by low interest rates and an enhanced ability to borrow. In the future, however, interest rates seem to have only one place to go: up, and thereby depressing valuations.WHAT ABOUT INFLATION?Ihopewenevergetbacktothedouble-digit infl ation rates of the 1980s, but right now our heads arespinningwithmanyexamplesofcostsgoing haywire:crewwages,constructionmaterials,real estate, and fuel. As weve seen with interest rates, this will present new challenges to your margins and eventually your balance sheet. Youll struggle with the decision to pass or not to pass along price www.beurteaux.com increasestoyourcustomers,allatthepossible BUSINESS MATTERS 26 FOGHORN'