PEMCF Valuation Snapshot - Winter 2023

Valuation Snapshot

Winter 2023

Multiples holding up well

During Q3 of 2022 the overall slight downward trend was driven by indices moving in conflicting directions.

Argos declined to its level of December 2021 due to a correction at the larger deal end of the market with the lower mid-market being stable. Mark to Market

Welcome to the latest edition of Valuation Snapshot. In this regular publication we look at the trends and issues behind business valuations, and provide bite-sized advice that can help you and your clients when valuing a company.

was up slightly due to higher deal sizes in the sample. PCPI saw a slight drop on the trade deals that we report, although its sister index showed Private Equity paying higher multiples in the quarter. Considering the economic headwinds reported multiples have been holding up well.

Key valuation indices Q2 2018 to Q3 2022

Using and choosing an Expert Witness valuer

An Expert Witness’s duty is to give a Court or tribunal an impartial expert opinion on particular aspects of matters within his or her expertise which are in dispute.

This is different from an expert adviser who works with one party to help pull together their claim or defence. An adviser, as distinct from an Expert, only owes duty to the party who instructed them.

Following Court rules an expert reports to the court to give an opinion based on the subject matter and on the instructions given to them. They must be truthful, impartial and independent. A good expert report will set out the facts and assumptions that underpin it, and then clearly lay out analysis that can be understood by laypersons. It shouldn’t be jargon heavy. Analysis and explanations are followed by the Expert opinion.

An expert doesn’t advocate and argue a case. They don’t provide opinions beyond their expert area, they don’t advise or negotiate and they don’t take

on appointments with conditional fees. There are three types of expert. A Party Appointed Expert instructed by one party to a dispute to assist the Court, a Single Joint Expert instructed by all parties to a dispute, again to assist the Court, and a Expert Adviser or Shadow Expert appointed by one party to advise them in a dispute but with no duty to the court.

An Expert Witness’s opinion can lead to a resolution before the case gets to Court while on other occasions the Expert may give evidence to the Court.

When choosing your expert ask if they’re accredited, can they meet the timescales, have they any conflict of interest, do they have the required specialise knowledge and understand the Court rules?

Business Valuation Bloopers

- some ways it can go

wrong

Bloopers are the mistakes made by cast or crew on a film that sometimes run during the end titles. Sometimes they can be better than the film!

So here’s some valuation out-takes to avoid.

“I believe you”

Don’t believe everything you’re told. We’ve seen reports where advisers have based calculations on profit figures supplied by directors without challenging them or reviewing the business. Sometimes its pretty clear that most of the text is templated and applied to any and every business.

Lies, d*mn lies and statistics

Statistics can be used to prove anything – just ask any politician. For business valuation there are a range of indices available from which to source earnings multiples. The lazy adviser might just reach to for one of these without questioning it or corroborating it with other data. But such indices are averages – and so they say nothing in particular about any one sector or company. It doesn’t matter which you use, on its own a generic multiple will only be right by accident.

Apples and Pears

Don’t mix apples and pears or you’ll get a curious byproduct. Likewise there are a range of profit measures,

EBITDA, EBIT, PBT, PAT, Operating Profit. And a range of multiples including EV:EBITDA and the price earnings ratio or PE ratio. If you apply a price earnings ratio to EBITDA you will significantly overstate the result.

Rules of Thumb

As business valuers we wouldn’t disregard rules of thumb in a particular industry. Transactions involving shops, cleaning companies, and professional service firms are amongst those where one comes across them. But one should only ever use them as corroboration of more rigorous methods. So while shops are often sold for a number of weeks turnover plus the value of the stock – ultimately this must also equate to an earnings multiple. However, where data is patchy it’s probably a useful ready reckoner of valuation. But inappropriate, and unquestioning, extension of these rules to other sectors isn’t smart.

The answer, and you’d expect us to say this, is to find a business valuation expert who knows what they’re doing, and produces a well reasoned valuation that would stand up in court if you ever found yourself there.