Spring 2016
Valuation Snapshot
Welcome to our sixth 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.
Key valuation indices to Q4 2015 Since our last Valuation Snapshot, the PCPI has fallen by 7% whilst the Argos Index has regained its all time high level of 2006. Digging beneath the raw statistics one can see what’s going on as the PCPI shows private company sales and private equity deals separately while Argos blends the two. Taking into account PE deals over the period running at higher multiples (10.9x at Q4 2015), the two results are actually consistent.
Meanwhile PERDa, which is a useful measure of smaller deals, could do with being published more frequently by Leading Edge – the last available data from its publishers is June 2015. In its absence the UK 200 Group’s SME Valuation Index is up 20% over the year to 6.1. This is the lowest of the indices as it tracks smaller deals. The net effect on our “poll of polls” index is a decline to just under 8x.
Valuing the Star Wars franchise Asman Damodaran of the Stern School of Business at New York University had a go at valuing the Star Wars franchise. Disney paid $4Bn for it – so did that turn out to be a good deal?
gaming stays at $0.5/dollar, and he assumes that with the distribution power of Disney and Netflix (rumoured to be planning three live-action series) TV rights will increase to $0.5/dollar.
Damodaran reviews the franchise to see where the revenues have come from. Interestingly the original film is still the biggest grosser to date at nearly $4Bn. But the other revenue streams are even more important; VHS/DVD/Rentals, Toys, Gaming, Books, and TV series.
A good deal for Disney?
These other revenues dilute box office receipts to 20% of income alongside 23% for rentals, 15% for gaming and books, and a whopping 36% for toys and merchandise.
So how do you value it? Like any other business, one needs to take a stab at future earnings potential. In the absence of Disney’s forecasts, which are no doubt closely guarded, Damodaran makes educated guesses. Starting with Disney’s intent to make another two films, he then assumes they’ll each gross something similar to Star Wars: The Force Awakens. I’d have assumed some slight decline each time around (as the history suggests) but you have to start somewhere. He judges that add-on revenues will continue to be more important - streaming replaces rentals and he assumes $1.20/ dollar v $1.14/dollar thus far, toys continue to generate $1.80 for every dollar of movie income, books drop 25% to $0.20/dollar,
One needs to keep making assumptions, when the films will be released, inflation, and of course the margin levels on the income streams – he uses sector averages here, for example toys/merchandise at 15%. Put it all together and you get an overall net income projection which he discounts at 7.61% (being the average cost of capital for the entertainment sector). The net result is a valuation of $10Bn. So Disney did a good deal. If you want the full calculation Google “Galactic Finance: Valuing the Star Wars Franchise” which will take you to his blog. It shows you can build up a cogent case to value almost anything, although I’d have factored in some kind of discount just because of the existence of Jar Jar Binks. May the force be with you.
Lake Falconer lake@pemcf.com
Getting value from your intellectual property You can get a patent on the workings of the new product you’ve designed. You can build a brand around the name you give it. And you can secure specialist design rights on its individual features. But having protected all this creative ingenuity, how do you turn it into an income stream?
Use a patent There’s a surprising range of answers. You can use a patent to stop people selling their version of your patented product and aim to monopolise its sales in that market. In addition, you can also license those same would-be competitors to generate you a positive income stream as well as pursuing your own sales.
use your granted rights to stop competition, or to allow it only under your terms
with your franchise holder, not you, bearing the business’s cash flow burden.
Use your rights The same choices are there for you if you’ve protected your designs as individual works (often mis-labelled “copyright” designs) namely, use your granted rights to stop competition, or to allow it only under your terms and without affecting your freedom to carry on competing in the same market.
IP as an asset However, there is another much less well known method of turning your protected IP into an asset without ever having licensed it, franchised it, or even sold products yet – and that is to have it valued by an IP valuation specialist. It’s an asset, albeit an intangible one, and it can be used in the right circumstances for leveraging a loan, freeing money from a pension fund, bolstering your balance sheet and justifying (or denying) a movement in your share price.
In conclusion Protect your brand A protected registered brand name or logo can be used in the same way, fending off competition from those who try to sail to close to it. You may also want to consider sub-licensing the brand to them whilst still continuing to own it (and control it) for your own continued sales use. Grant them a franchise under the right conditions as yet another source of welcome cash, this time
William Jones williamjones@ip21.co.uk
Valuing patents, trade marks and other IP forms as stand-alone assets, even when there’s no commercial income stream yet attributable to them - and valuing these assets is skilled work for specialists. Universities, R&D departments, and commercial businesses have sought specialist IP advice for many years as they rightly want to see some internal value put on their IP given the cost of obtaining it in the first place.
PEM Valuations 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.
Personal We have a flat structure so clients always receive cost effective senior level attention.
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.
Tailored 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.
Get in touch: 01223 728 222 pemcf.com/valuations PEM Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority, registered number 212875. Registered in England & Wales, company number OC302288. Salisbury House, Station Road, Cambridge, CB1 2LA. If you no longer wish to receive this publication, or if you have had a change of address, please email info@pemcf.com.