Crazy P/E is the market outcome in any low interest rate environment. If an investor wants to get 2% over the safe (read: government bonds) rate of return and the safe rate is 4%, then the investor wants a 6% return and that gives you price/profit ratio (not quite the same as P/E, I know, but for purposes of lifestyle business income this is the relevant number anyway of about 16).
If the safe rate is 0%, then the investor is willing to settle for a 2% return and you get a price/profit ratio of 50. Given identical profits that means 3x the valuation.
In real life this is a bit more complicated, because investors may not necessarily seek a simple additive percentage on top of the safe rate of return, but the same dynamic plays out in general.
Or to put another way, say you have a lifestyle business with $100k/year of profit. That's nothing too special. What valuation should that correspond to? Depends on risk, of course, but $1-2M doesn't seem unreasonable; that corresponds to 5-10% annual return, which is pretty good right now.
Crazy P/E is the market outcome in any low interest rate environment. If an investor wants to get 2% over the safe (read: government bonds) rate of return and the safe rate is 4%, then the investor wants a 6% return and that gives you price/profit ratio (not quite the same as P/E, I know, but for purposes of lifestyle business income this is the relevant number anyway of about 16).
If the safe rate is 0%, then the investor is willing to settle for a 2% return and you get a price/profit ratio of 50. Given identical profits that means 3x the valuation.
In real life this is a bit more complicated, because investors may not necessarily seek a simple additive percentage on top of the safe rate of return, but the same dynamic plays out in general.
Or to put another way, say you have a lifestyle business with $100k/year of profit. That's nothing too special. What valuation should that correspond to? Depends on risk, of course, but $1-2M doesn't seem unreasonable; that corresponds to 5-10% annual return, which is pretty good right now.