Florida Business Valuations Expected to Rise in 2021, Reflecting Better Florida and National Economic Trends
By Chris Curtin & Lew Koflowitz
Business valuations in Florida are expected to rise in 2021, as a result of positive forces at work in the state’s economy.
Economists who closely study the Florida economy as a whole, as well as the regional economies within the state, concurred that the evidence is clear that Florida’s economy will improve by 2021, in terms of jobs, residential real estate sales, increased permitting for new housing, strengthened tourism, hospitality, wholesale and retail, manufacturing, and foreign trade.
The Central Florida Institute has projected an annual statewide unemployment rate of 8.2% for 2020, 5.5% for 2021, and 3.6% for 2022. The leisure and hospitality industry will lead to the revival of employment, which is projected to rise by 31% in 2021 after contracting 8.6% in 2020 owing to the effects of the pandemic. According to the travel data group STR, statewide hotel occupancy was 43.3% in June — far below the 74.2% seen this time in the previous year.
Based on a recent report by the University of Central Florida Institute for Economic Forecasting, Florida’s economy is projected to recover by 7.6% in 2021. In reference, the Conference Board, a non-profit group of economists, expects a 4.9% downturn in the US economy in 2020 and a 2% rebound in 2021. According to these economists, the positive economic trends mean that demand for goods and services across the state will be better in 2021 than in 2020. This should translate into higher valuations for businesses changing hands in the following year.
Furthermore, the Author and Director of the Institute Sean Snaith also affirms that it will take until 2023 until Florida reaches full employment; other sources have defined that year as the possible date when core components of the state economy will be completely recovered. While there may be a projected turnaround in the coming year, it was also the recession that coincided with the current impacted Florida drastically, where the state’s economy declined ahead of the country as a whole and is coming out of recession later than most other areas of the country.
Housing is Turning Around, with Implications for the Florida Economy and Business Valuations
On the bright side, because of the improving housing environment, Florida will be growing more rapidly than the US economy as a whole. However, the state’s economic growth, like that of the national economy, will still not be growing fast enough to reduce unemployment to acceptable levels. But the projected growth next year will be a “springboard” for more rapid growth in Florida in the coming years.
“Low inventories of existing homes for sale and lagging housing start growth contribute to an environment where home prices continue to rise at a rapid pace. The shortage will be resolved as the pace of single-family housing starts ramping up over the next several years,” Snaith stated.
The availability of single-family homes will remain in short supply, while housing is beginning to increase in the short term. Moreover, it is projected that total starts will exceed 133,656 in 2018, 148,610 in 2019, 154,958 in 2020, and 156,376 in 2021.
Snaith added, “Unlike the last recession, there’s no albatross of a collapse in the housing market that really weighed down for many years. I think housing is still in the same situation, which is that there’s a shortage. So that ongoing housing boom will certainly help and feed into this recovery.”
Changes in the Economic Policy
Economic policy developments led by the federal government will continue to support the economy of Florida over the next four years. The state economy will grow by 3.5% this year and 4.3% in 2019, as assessed by Real Gross State Product, before easing to 2.9% in 2020 and then 2.4% in 2021.
“Through 2019, growth will accelerate as the Trump administration’s economic policy helps to boost Florida’s economy. This faster economic growth will also generate a more rapidly growing labor force,” Snaith said in a recent forecast.
According to the projection, labor force growth in Florida will average 1.5% from 2018 to 2021. Construction (6.6%), Technical & Business Services (4.6%), Banking (2.1%), Leisure & Hospitality (1.4%), Education & Health Services (1.3%), and Commerce, Transportation & Utilities (1.1%) are the industries that are expected to see the highest employment development.
Drivers for Increased Valuations are in Place
Population growth, increased tourism, and a turnaround in housing sales and construction are beginning to create increasing demand for a wide variety of goods and services, important drivers of business growth, and ultimately, valuations of businesses, Snaith said.
In addition to overall business demand, Snaith noted, business valuations are built on fundamentals of the specific business organization being valued, including the management of the company and the industry sector involved – i.e., the organizational and economic underpinnings of the business. Indeed, in business valuations and buy-and-sell transactions, management of the firm is critically important in valuing the business. In that regard, each situation will differ, since the valuation placed on business will depend on. For example, what current management has been able to accomplish.
Thus, given the economic outlook for Florida and for the overall national economy, the experts are projecting gains in valuations in 2021 over 2020, taking into account, of course, the many uncertainties. However, given that most economists are anticipating growth at the national level this year, and that analysts of the Florida economy are anticipating better-than-national growth in the state, economists we spoke with are now expecting Florida business valuations to climb moderately, especially during the second half of 2021.