Posts Tagged ‘vALUATION’

The latest bizexchange index report on Australian private business value is show some interesting results and highlights the need to keep a close eye on the market for business sales in Australia. Before we analyse the numbers a couple of key findings shed light on key issues for business owners as they prepare for an exit or succession plan, which includes selling their business. The rebound in market sentiment in the second half of 2009 looks like more of an aberration as the net sentiment heads back into negative again. The volume of businesses advertised for sale in June 2011 has skyrocketed to a record high unfortunately at the same time the value of the index simultaneously reached a new record low. The rapid growth in listing volumes is predominantly at the smaller end so for the first time three out of four listings during the quarter have EBIT ratios below two. Also for the first time there are an equal number of listings with and EBIT ratio of less than one as there are with EBIT ratios greater than two.

The premium paid for larger businesses, particularly those in the middle market ($5-$15 million turnover) remain strong. This end of the market is strongly influenced by equity markets with mergers and acquisitions the primary source of buyers. While retiring micro business owners flood the smaller end of the market dragging these prices lower. Over the last 12 months there’s been a steady convergence in the values of business below $5 million in turnover. This reflects the divergences value to businesses seeking private buyers compared to those more likely to be purchased by other businesses and again strongly reinforces the need for strategic exit and succession planning in preparation for sale.

Larger business owners preparing to retire should, if well-prepared, have far more success than those smaller businesses. Australia equity markets are underpinned by the constant flow of superannuation contributions of Australian workers. With the equity raising requirements of the larger Australian businesses readily met by these funds and Australian & international business loans there is a surplus of investment funding. This surplus translates into higher P/E ratios for respected listed companies. Consequently, listed Australian businesses will continue to have the opportunity to profitably finance their expansion by acquiring privately owned businesses at lower P/E ratios and they have themselves. It is this practice which will underpin the value of larger privately owned businesses. Accordingly businesses in the medium and middle market need to actively consider how to increase their appeal as a potential acquisition target as part of their exit planning and succession strategy.

The numbers are also interesting in terms of the middle market businesses – retail trade for example are seeing very low EBIT multiples of 0.87 turnover below 5 million turnover and 1.39 for turnover between five and 15 million, whilst at the higher end property and business services are achieving multiples between 3.35 and 4.12 for larger businesses. Many micro businesses (turnover less than 500 K) are failing to achieve a multiple of one with several industry sectors between 0.58 and 0.92. Again the premium for size becomes lastly important.

The percentage of distribution of listings by EBIT value also reveals an interesting trend with over 24% listed at less than 1, 50% between one and 2, 20% between two and three and only 6% above three times multiple. In terms of business value as a multiple of EBIT the vast majority of businesses during the quarter sat between two and three times multiple of EBIT.

A LATE twist in the bidding war for the accounting software provider MYOB has led to the US private equity fund Bain Capital prevailing in a $1.2 billion deal. A competitor, the British-listed software provider Sage Group, had been leading a pack of rival bidders – including private equity giants Kohlberg Kravis & Roberts and Hellman & Friedman – with a $1.35 billion offer.

It is understood Sage’s bid fell through late last week after falls in its share price – hammered by the broad sharemarket selloff in Europe – meant the value of the MYOB transaction would now exceed 25 per cent of Sage’s market capitalisation. The deal would have required the lengthy and uncertain process of a shareholder vote, which prompted MYOB’s owner, Archer Capital, to look elsewhere and accept a bid worth 10 per cent less.

It is still a hugely profitable deal for Archer. The acquisitive private equity fund bought MYOB in February 2009 for about $500 million, and then boosted earnings by stripping out costs, raising prices and aggressively growing its customer base. ”We doubled the profitability. We basically achieved the three or four things we set ourselves before we acquired it … and we had a lot of inquiry from potential buyers,” an Archer partner, Peter Wiggs, said, explaining the rationale for the sale.

The deal is understood to have been valued at a multiple of 11.3 times earnings before interest, tax, depreciation and amortisation. MYOB is used by more than 1 million small- to medium-sized enterprises in Australia and New Zealand.

Read more: http://www.smh.com.au/business/archer-takes-12b-for-myob-20110821-1j4pf.html#ixzz1VhQMXDGK

One of the most common questions we get asked is “what is my business worth?” and whilst there are certainly some financial and accounting formulas that could be applied to answer this question there is also a hell of a lot work that needs to be done that is nothing to do with finance or accounting but rather with the commercial and operational issues within the business largely utilised to determine risk.
Risk is an important aspect of this equation – as like any investment – risk and reward are directly related -in other words the higher the risk the lower a valuation versus comparative businesses.
EBIT multiples (earnings before interest and taxes) are a commonly used tool to estimate the valuation of comparable businesses, occasionally EBITDA multiples are used (earnings before interest tax depreciation and amortisation) this method also removes the non-cash expenses of depreciation and amortisation and therefore gives you a realistic picture of the cash which might be generated by the business over a period of time – in other words the reward you can expect for your risk.

The most common way to utilise an EBIT multiple to calculate the value of your business is to find a comparable business and see what EBIT multiple it is currently trading at – whilst this information is often difficult to find with small privately held companies it is quite easy to obtain for larger listed companies – in fact these numbers also called P/E ratio (price to earnings) are published in most of the financial newspapers. The issue though is that there is a substantial difference between most listed companies and small privately held businesses which inherently involve significantly more risk (and therefore a reduced EBIT multiple).

One method is to take the multiples for listed companies that are as similar as we can possibly find (although this in itself is often difficult) and then discount that back to account for the increased risk in the small privately held business. In other words a listed company may will be trading at need multiple of 9 or 10 times and we would discount that back to account for a number of factors (see some examples below) so the small private company may well be trading on a multiple of 3 or 4 times.

Some of the common discounting factors relate to management experience and expertise (including the risk of key man dependence), geographic risk (often small businesses are based in one location only), financial and capital risk (small businesses are often restricted their ability to raise capital or debt to fund further growth and expansion of the business). There are a number of other issues that we would examine when undertaking the valuation but as you can see in most cases small privately held businesses can be discounted substantially from the EBIT multiples we see on listed corporates.
In order to maximise the value of your small privately held business – it needs to look and feel as much as possible like a large listed corporate and that is often about reducing risk in as many areas as possible.

Often we work with clients whose uncertainty about which phase their business is actually in ( or should be in ) – expansion or efficiency – causes difficulty and confusion. One of the most difficult aspects of strategic business planning, especially around succession or exit transition planning, is this aspect of efficiency or expansion. In my view, businesses simply can’t do both effectively – that is you can’t successfully grow and expand whilst building within the business, systemised processes and efficiencies. The two require a different mindset, different focus from team members and deliver vastly different business outcomes. In many cases, where businesses have been able to focus only on expansion they can actually achieve that phase of the business, only to find customer complaints increase, staff turnover becomes an issue simply because they haven’t built any efficiency into the system – there are no structured policies and procedures, the processes are not documented. As the business grows it actually becomes more and more inefficient, this combined with the fact that growth requires funding often causes cash flow and financial difficulties within the business.

A good strategic succession plan must combine and manage timing of the phases between expansion and efficiency and ensure the business is never doing both at the same time. I have one client who has an entirely different management style (for example the agenda at monthly management meeting changes) depending on which phase the business is in. When the business is in expansion phase the focus must always be on sales and marketing – new clients, new contracts, new-product development, new networking relationships, new referral agreements et cetera et cetera. In efficiency phase, whilst we don’t ignore any of these we certainly don’t focus our attention on those areas – our attention must be focused on building systems, documenting policies and procedures and ensuring every aspect of our process is as efficient as possible. The board’s role is to advise the CEO / management team on which phase they should be in and how to transition between the phases over time. Effective management of this aspect of strategic succession planning alone can dramatically improve the business outcome and value.