Valuation Snapshot - Summer 2017

Summer 2017

Valuation Snapshot

Welcome to our tenth 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.

Prices and volumes driven upwards Prices paid for businesses seem to be firming up. Since our last Valuation Snapshot, valuations have increased by around 4%, and in recent months there is more consensus amongst the indices.

Both the PCPI and Argos indices have risen by an average of 5%. PERDa reports less frequently so maybe it too would also show an increase. This is the highest quarterly uplift since December 2014.

Interestingly, taking a six month moving average to iron out short period fluctuations, our chart below shows an uninterrupted pattern of price growth since June 2013.

At the same time deal volumes are up and liquidity seems to be a key market driver.

All good news!

Strong private equity funding, availability of debt, and cash rich corporates means that it’s a sellers’ market. It’s also true that in a world of continuing low interest rates investors and corporates are seeking better returns.

Key valuation indices Q2 2008 to Q2 2017

Be alert to why your clients might need a valuation We get asked to value businesses for lots of reasons. Here’s a sample list.

Compliance

Providing certainty

1. Raising capital

Raising equity finance can help to drive the growth of a company but it’s important to know what the business is worth to avoid undue dilution from selling shares too cheaply.

2. Acquisition

Pre-transaction valuations can give comfort to shareholders that the Company’s directors are acting for their best interests.

3. Shareholder exit

5. Financial reporting

This includes s.593 valuations for compliance with the Companies Act 2006, or providing an opinion on the fair value of goodwill (including any impairment) for a highly acquisitive company that is unsure how to allocate the transaction purchase price.

6. Tax reporting Tax driven valuations can be needed to calculate estate or gift taxation or for those corporates which are restructuring.

Disputes 7. Divorce

We’re often asked to value companies to support negotiations on share value around the exit of a shareholder.

Valuations are often required in commercial disputes and in relation to divorce.

Employee Schemes

Other

4. Share-based compensation

8. Opinions

Share-based payments often have financial reporting and tax implications for the issuing company and the employee receiving the shares. A formal valuation gives the issuer and the employee comfort that the exercise price is within a fair range.

pemcf.com/valuations

Opinions are required for insurance policies or stakeholder pension schemes.

9. Exit planning

Working out how to build the company to a desired value pre-sale, and as input to corporate strategy.

David Smith, Assistant Manager e: david@pemcf.com t: 01223 728222

Valuation lessons from the 2012 Stabilus case This High Court case is interesting for the comments made by Justice Eder about Expert valuations.

Stabilus is a leading German manufacturer of gas springs and hydraulic vibration dampers used in the automotive industry and was the subject of a number of transactions. In 2008 it was bought by Paine & Partners LLC for €519M. Shortly afterwards the company got into financial difficulty and underwent a major restructuring in 2009 which carved up all the value to the Senior Lenders leaving nothing for the Mezzanine lenders. Unsurprisingly – with €83M at stake in the Mezz layer – the Mezzanine lenders challenged the validity of the restructuring. Three different valuation firms gave opinions and three of the “big four” accounting firms were involved one way or another.

Key lessons The 100 pages long judgement had some key lessons for business valuation.

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Use of previous valuations: If they’ve been prepared for internal reporting purposes rather than “fair market value” then they’re not suitable support

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Business plans: Adjusting forecasts without considering the reasons for variations is not acceptable, and past variations from plan are not an automatic indication that there will be future variations

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Other Experts’ reports: The Expert must request to see other Witness reports to check assumptions and any deviations from their viewpoint. Any deviations must be fully supported

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Discount to EBITDA multiples relative to guideline companies: The judge was happy that EBITDA multiples should be discounted. He commented that applying a discount is qualitative rather than quantitative. The Expert needs to compare the risk, size, and growth pattern of the business being valued to the guideline company when estimating a suitable discount. Stabilius had a lower growth rate than the rest of the industry which justified a lower multiple

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Hindsight: The valuer must focus on the facts and business outlook as at the valuation date. Hindsight is not a sense check for assumptions at the valuation date

Ultimately the Judge agreed for the most part with the American Appraisal valuation – that the mezzanine debt had no economic value at the date of valuation.

Lake Falconer, Partner e: lake@pemcf.com t: 01223 728306

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 advisers, valuations are not their 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.