Valuation Snapshot
Summer 2021
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.
Multiples are bouncing back Our latest snapshot of SME market multiples shows strong growth in Q4 2020 sustained into Q1 2021. The biggest driver for this is the Argos index and its strong performance in Q4 2020. Whilst market sentiment and liquidity driven by COVID-19 vaccine progress and the central banks are influential,
the biggest driver is the healthcare and technology sectors in which a large proportion of reported deals in that quarter arose. These sectors are spared or even favoured by the Covid crisis and this pushed up the index averages. The good news is that it has been sustained into 2021 so far.
Key valuation indices Q1 2011 to Q1 2021
How do you value a football club? In 1985 after 95 years of success, and when nobody was asking for it, The Coca-Cola Company decided to change the formula for its Coke soft drink. The new drink was imaginatively called “New Coke”. But reaction to it was overwhelmingly negative and it was withdrawn in just 79 days. Surely a world record for the shortest time to announce the withdrawal of a high-profile commercial venture. Until now. The recent attempt by 20 of the top football clubs to create a European Super League went from initial fanfare to abandonment in just 3 days. Conventional valuation methods don’t work terribly well when compared to the prices paid for clubs. The market method which seeks to compare with publicly traded entities is hard to use effectively given the small number of publicly-listed football clubs. The discounted cash flow method relies on a clear quality forecast of profitability which is never going to happen in this sector. And using revenue multiples is a bit simplistic and takes no account of things such as the clubs’ stadium, assets and cost base. Well it turns out that there is a model to do so. Dr Tom Markham is a graduate of Liverpool University’s MBA in Football Industries. His dissertation on valuation, in which he came up with the model, won the Premier League Best Dissertation award. And it seems to be quite widely used. The Markham model is basically an enhanced revenue multiple valuation. But it factors in the state of the balance sheet, profitability, stadium utilisation, and the wages ratio. These are all KPIs that are tracked for clubs.
Value = (Revenue + Net Assets) * ((Net profit + revenue))/revenue) * (%stadium filled/% wage ratio) Put simply the bigger the turnover, the greater the asset value, profitability ratio, and how close to stadium capacity attendances are the higher the valuation. And a higher wage ratio (wages/revenue) lowers the valuation. Interestingly for the six English clubs their revenue multiples are remarkably consistent with the top five ranging between 6.2x and 6.6x with only Tottenham at 4.7x much adrift from the average of 6.2x. It would be interesting to see statistics for the lower leagues which of course will have smaller stadia, and revenues but lower wage bills. There’s not enough information in the public domain to do the same calculation with Cambridge United F.C. – but I’d hazard a guess that the revenue multiple could be a low as half the above.
Lake Falconer lake@pemcf.com
EOT - the pursuit of happiness? The seventh anniversary of a relationship can be associated with the decline of happiness as each party re-evaluates the other. The same cannot currently be said for the Employee Ownership Trust (EOT) regime introduced into tax legislation 7 years ago with great fanfare. Recent momentum EOT’s appear to be gathering momentum, spurned on prior to March 2021 by rumours of increases to the rates of Capital Gains Tax (CGT) in the March 2021 Budget with company owners and advisers appreciating the merits of the CGT deferral relief for capital gains made on the qualifying sale of a controlling interest in their company’s to the Trustees of an EOT. Where implemented correctly, an EOT represents a credible alternative to an MBO, with the above CGT advantages for the vendor and, subject to certain conditions, the potential to pay tax-free bonuses of up to £3,600 per annum to employees.. Navigate the minefield However, the use of an EOT is not necessarily without risk of challenge by HM Revenue & Customs (HMRC) as the EOT legislation can be a difficult minefield to navigate. For example, the price paid by the Trustees of the EOT for their controlling interest must be made as a bargain at arms-length and cannot
Matthew Eady meady@pem.co.uk
be more than the “price which those assets might reasonably be expected to fetch on a sale in the open market”. The purchase price will also need to take account of future company obligations if the purchase price, funded by the company, is deferred. Furthermore, assuming that the vendor holds employment-related securities, to pay that vendor an amount in excess of the market value creates an immediate income tax and National Insurance Contributions liability due under PAYE on the excess above market value. Trustees also have fiduciary duties to act in the best interest of the Trust’s beneficiaries and therefore should not pay more than market value. Get an independent valuation first Unlike approved share schemes, such as EMI, SIP or SAYE, there is no mechanism to seek HMRC’s agreement to the market value of a company for EOT purposes either before or after the transaction. It is therefore best practice that prior to the sale of shares to an EOT that an independent valuation of the company is sought on which the directors and Trustees can base their decisions to fund and to purchase respectively. Such a valuation should also be referred to within any clearance application submitted to HMRC, seeking approval for tax purposes of the arrangement.
PEM Valuations From time to time, your clients may ask you how to value their business. Such requests could be triggered by: ▪ ▪ ▪ ▪ ▪ ▪ ▪
Divorce Shareholder exit Probate Restructuring Share incentive schemes 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 pem-businessvaluations.com PEM Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority, registered number 212875. Registered in England & Wales, company number OC302288 at 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.