Latest Industry Multiples with Valuation Affairs Jan 2019
Helping SME business owners have a wealthier affair with the value of their business
A regular review of the market and economic trends that will have an impact on industry multiples and SME business valuations.
Exit Value Advisers create wealthier affairs between business owners and the value of their SME using in-depth business valuations and innovative exit strategies. We deliver clear and defendable valuations that support transactions, exit strategies, restructuring, investment, dispute resolution and succession planning.
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SME Valuation Industry Mutliples
January is always a quiet month in terms of buying and selling businesses – most are on holiday trying to de-stress and forget business worries. But as February arrives it always seems to be a month of change. We often see enquiries from business owners wondering what to do next. This year we have had several enquiries from business owners considering acquisition rather than divestment.
I think this represents the uncertainty around the next 12 months in terms of economic direction as well as potential state and federal political and regulatory change.
Some of the key trends and points from the data from the Christmas/New Year period include:
Transaction data for EV of $1m - $5m reflecting lower multiples than the $5m - $20m EV range – our favourite phrase rings true - size matters when it comes to valuations.
The small end of the market shows EV:EBITDA multiples of 0.7x – 3.7x for EV less than $1m. The average multiple was 2.1x. These are on advertised businesses and not actual transactions. We will be adding to this segment over the coming months.
The high 11.4x EV multiple shown in the charts reflects a significant multiple paid for St David Dairy in June 2018, which has only been recently entered into our database.
The ASX listed IT sector (Technology, Media and Telecommunications) is trading at an 11.8x EV:EBITDA multiple, above the ASX200 average of 9.8x (Interfinancial TMT January 2019 Dashboard).
We have continued our correlation between EBITDA multiples and EBITDA and as more data is collected we will extend the categorisation to identify more meaningful correlations. The data continues to emphasise the philosophy that size counts.
We have also completed a number of valuations based around intellectual property (predominantly software). In completing our research we have noted several strategic acquisitions by listed entities for businesses that have a valuable IP but are yet to deliver commercial level EBITDA results. In essence the transactions provide some limited guidance of intangible asset valuations.
ASX EBITDA Multiples
The ASX bucked the December trend and increased in total value by 1.4% (based on capital growth and dividend returns) over the last twelve months and the ASX200 increased 3.7% from the previous month. The average PE ratio in January 2019 also increased to 14.7x and an implied cost of equity of 10.0%, down up from 9.6% six months ago.
Market commentators such as Market Matters have made the point that volatility is expected to continue over the next 12 months, and there is a reasonable chance the ASX200 will not show significant growth. How much of this volatility will influence the SME market for business valuations is not clear yet, however we are expecting to see some reluctance to pay premiums to market value in some industries.
Unsecured loan rates have maintained a marginal increase over the last 3 months, and our view is this will increase further in the next 6 months.
EBITDA Mutiples for $1bn+ infrastructure have increased marginally, with manufacturing dropping by 6% since November 2018. Large retail stock EBITDA Multiples remain largely unchanged from November 2018. EV:EBITDA Multiples ranged from 10.3x average for retail to 19.9x average for infrastructure stocks.
The sub $100m market cap group has shown a 6% increase in the average EBITDA multiple with significant increases in individual stocks (BIS, LBL and EOL). The Median EV:EBITDA Multiple was 11.5x
We will update the multiples post half year reporting season which will provide some valuable trend indications.
Trends in Cost of Capital By Sector
Enterprise Value EBITDA Multiples for selected large infrastructure stocks ($1b EV) have remained at 19.5x, with large manufacturing at approx 17x. Large retail stocks remains at lower multiples of 10x.
The sub $100m EV stocks have increased average EV:EBITDA Multiples by 6%, whilst the larger $100m - $200m EV stocks have reduced by 1%.
As expected, SME EV EBITDA Multiples have largely remained the same.
Overall SMEs are attracting an implied cost of equity of 30% - 38% and the mid-market of 15%.
We remain of the view that the cost of equity is likely to increase in the near term as global risks start to impact profit margins and growth. The results of the half-year ASX reporting season will give an indication of earnings trends.
Trends in Economic Stats
Economic commentary for January mainly focused around a slowdown as some economic data issued suggested growth still remains patchy. The key factors driving this discussion are:
OECD revising global growth down to 3.5% over the next twelve months, from 3.75%.
Key external risks such as China-US trade wars and implications of any Brexit deal.Continued falls in the housing sector as both prices, dwelling approvals and housing finance all showed continued reductions.
Reduced retail spending.
However on the plus side we are seeing:
Near record low levels of unemployment and micro-movements in wage growth.
Continued investment spending by government.
Increasing commodity prices and a reduced exchange rate supporting an improving trade surplus.
In the RBA Governor Lowe’s recent speech he pointed out that whilst growth has slowed and the economy has been impacted by a housing industry downturn, “..what we are seeing looks to be a manageable adjustment in the housing market.
It is not expected to derail economic growth.”
It is interesting to note that whilst the half year ASX earnings reporting season is only just underway, we have seen some early positive results for corporate earnings growth. I can see the retail sector and some areas of the financial sector will see reduced activity, however overall ASX valuations are being maintained or even increased.
Our view of the next twelve months remain that whilst growth will show signs of slowing, we are far from any recession and I do not remain convinced that the slowdown will continue. Low Aus/US exchange rates will make exports more competitive and support ongoing trade surpluses, whilst any reduced local consumption will help to temper the impact a lower exchange rate will have on imports.
High levels of infrastructure spending and continued business investment will help drive increased earnings across some sectors of the economy. We must also be aware of the uncertainty that often comes with elections, both federal and NSW state election. It is likely that the first half of this year will see the economy stagnate and then show much more positive direction in the latter half.
In our newsletter next month we will have December 2018 quarter GDP growth rates as well as other economic data which will shed more light on economic activity.
We continue to be of the view that now more than ever, business owners should focus on increasing the profitability (and hence value) of their business. This will include pursuing both opportunities to increase revenue as well as lower costs.
Adding Strategic Value
We often get asked by clients – “can you find me a listed company that will pay big dollars for my business?” This is a common question and our standard reply is: “Yes we can but you need to be ready to attract the price they can offer”.
This month we highlight the benefit of being acquired by a larger entity, whether that is a listed entity or a larger private entity.
Larger entities typically have larger multiples, as noted several times in this newsletter. In particular many companies with enterprise values greater than $50m will have multiples in excess of 6.0x – 7.0x. If your business has something of sigfnicant value to a larger company then you may be able to benefit from the “multiple uplift” in any negotiated price.
The table highlights one POSSIBLE scenario where a smaller business is acquired by a mid-market company, wanting to secure new product technology (lets assume for the sake of the argument this deal is done).
In this case, market value for the smaller company attracts an EBITDA multiple of say 3.0x – however the acquirer has a cost of capital equivalent to 7.0x as a result of the larger size, more established systems and processes and increased EBITDA.
In theory when the larger company takes on the smaller company, their EBITDA will be valued at their higher multiple, giving an uplift in valuation equivalent to the target’s ongoing EBITDA times the difference in multiples. In theory the additional EBITDA from the acquisition is worth the price at their cost of capital.
In reality it is never that simple – and this is where negotiation and being ready to attract that price enters the process. The acquirer is only going to be prepared to pay the full premium if they perceive your business has the same or better risk profile as their business. In looking through all the key risks of the target, the acquirer will decrease the multiple according to the level of risk.
The less prepared your business is for sale – the lower the multiple.
The agreed multiple is also influenced by the negotiating position of both parties – and that is another commentary altogether. In essence the more the acquirer wants or needs your business, the more likely they will pay a higher price.
This is a very simplified analysis and there are other factors at play, such as changes in technology, industry and regulation. However the message remains the same:
You can achieve a higher price from a larger player but you MUST be ready to meet the challenge.
The key foundations to deliver increased multiples and make sure you are ready have been detailed in our Checklists of Highly Valuable Businesses that are free to download.
Our Business Valuation Experience
We have completed business valuations in all areas of Australia, either conducted remotely or we are happy to come to you. Our project locations include:
Business valuations Melbourne
Business valuations Sydney
Business valuations Brisbane
Business valuations Adelaide
We have the resources to complete projects in any location and have a deep awareness of the issues and trends in both metropolitan and regional areas.
This publication contains general information and is not intended to be comprehensive nor to provide financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or your business. Before taking any such decision, you should consult a suitably qualified professional adviser. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither Exit Value Advisers nor any of its associates or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.