Valuations Snapshot February 2014

VALUATIONS SNAPSHOT February 2014

Welcome to the first Valuations Snapshot from PEM Valuations.

In each issue we’ll guide you through recent movements in key business valuation indices, and discuss important valuation issues in our short articles.

This edition features: ‘The Difficulties of Valuing Early Stage Companies’ and ‘What’s It Worth? Buyer Vs. Seller’.

Indices analysis

PCPI, PERDa & Argos Soditic The bar chart on the left illustrates how business values: >> peaked in March 2007 >> fell sharply during recession >> have recovered steadily since March 2010 Interestingly, the decline began before the failure of Northern Rock and continued after the...

Left: The line graphs show the 3 main business valuation indices: Private Companies Price Index (PCPI); Private Company Price Earnings Ratios Database (PERDa); and Argos Soditic Mid-Market Index. The bar chart shows the average of the 3 indices.

Indices Analysis cont.

...Lehmans collapse.

In assessing the data it’s important to understand the differences between the various indices. For example, PERDa and Argos Soditic are published every six months, whilst the PCPI is a quarterly data set. Accordingly the most recent data is the PCPI for Q3 of 2013.

This begs the question: is the unusually high spike in the graph a real and significant upturn in values? Or is it just a blip? Unfortunately, the publishers of the data offer no insight as to any larger deals that might have skewed the results.

“Is the spike real or just a blip?”

In future editions of our Valuations Snapshot we will review the reasons behind the indices’ differing results and compare them to other data sets.

Featured article

Valuing early stage companies Valuing early stage companies is a key part of getting investment on board, but a tricky process.

The big problem is their lack of track record and decent forecast information. It’s interesting to illustrate this issue by considering three of the main methods used to value such a business: Discounted Cash Flow

This is difficult to use in practice as it’s too dependent on the exit price of the business.

Also, the certainty around forecast data decays the further out one goes. Still, it does have utility as a sanity check on other methodologies.

Comparative Multiples Also known as the Market Method, early stage investors rarely use this on the way in as it’s hard to find true comparatives. However, they often use it when

making interim valuations of the portfolio investments.

Heuristic When the chips are down, some investors will value based on “what things are typically worth at this stage”. For seed stage only investments (of the type normally done under EIS or SEIS by Business Angels), this will be in the range of £200k - £1M.

“Sometimes it’s just what gets the deal done”

Alternatively, investors might consider what founder equity is left after investment and whether it’s worth their while. Of course, if they’re keen to invest their valuation could simply be “what gets the deal done”.

Featured article

What’s it worth? Seller vs. Buyer

As psychologists know, most people fear loss more than they desire gain.

Thus a seller may often overvalue, while the buyer undervalues.

As corporate finance professionals, we see this from both perspectives when working on a transaction.

Seller: Sometimes a business owner’s view of value is just not supportable. Unfortunately, it can be difficult to adjust this. Vendors need to be wary of making valuations based on ‘off the cuff’ offers with no due diligence, or from past deals that failed to complete.

Buyer: We’ve recently advised a client to walk away from a negotiation because the vendor could not adjust his unrealistic price expectations.

“Deals have a habit of coming back around”

Nevertheless, buyers should be aware that it’s often worth keeping the door open. Deals have a habit of coming back to the table at a later date, by which time the business may be better or the seller more realistic.

PEM VALUATIONS

Business valuations for your clients

From time to time, your clients may ask you how to value their business. Such requests could be triggered by: >> shareholder exit >> disputes >> restructuring

>> business planning >> tax and accounting >> regulatory reasons

Yet for many advisors, valuations are “not the day job”. This is where the PEM Valuations Team can help.

Why refer your clients to us?

Focused Our valuations are produced by a specialist, multidisciplinary team with a valuations focus.

Commercial Our real world experience in company sale and purchase negotiation means we don’t just claim to be commercial, we have the transaction record to prove it.

Personal We have a flat structure so clients always receive cost effective senior level attention.

Tailored

Get in touch 01223 728 280 lake@pemcf.com

We do not use a software driven or “form-filling” approach. Our reports are based on a thorough understanding of the business to be valued, and tailored to the specific needs of the owner.

Our fee levels vary depending on the complexity, nature and purpose of the report required.

www.pemcf.com/valuations PEM Corporate Finance, Salisbury House, Station Road, Cambridge, CB1 2LA. To unsubscribe email peggy@pemcf.com