Valuation Snapshot Q1 2014

Valuation Snapshot Q1 2014

Welcome to our second issue of Valuation Snapshot, a regular publication created for business advisers.

Comparing the indices

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.

This issue explores key differences between the main valuation indices, the dangers of relying too heavily on marketing multiples, and the difficulties of valuing unusual assets.

PCPI, PERDa & Argos Soditic

When assessing data provided by the indices, it’s important to remember that PERDa and Argos Soditic are published every six months, whilst the PCPI is a quarterly data set.

PCPI tracks public domain information on unquoted transactions, and has an inherent bias to larger deals simply because they are better reported.

Another factor to consider when comparing these indices is that they track slightly different markets in different ways:

Argos is very much a European mid market index and thus reflects a different geography.

Apples and Oranges?

PERDA is based on “real data” submitted to its members and is much better at capturing and reporting small deal trends.

Trends

Valuation indices analysis

Since last quarter, PCPI’s spike has come back somewhat, Argos has risen, and PERDA has barely moved. Many reasons have been advanced for the fluctuations in both directions; from a buoyant IPO market giving private equity funds alternative exits, to strategic investors splashing out with accumulated cash balances. Our house view of the East of England market is of a slight but steady firming of prices.

Case study

12 11 10 9 8 7 6 5 4

EBITDA Argos Soditic

EBIT PERDA

EBITDA PCPi (EBITDA)

Average

Valuing unusual assets

Is there anything quite like Syd Barrett’s Christmas tree? The problem with valuing unusual assets is the lack of benchmarks.

Business valuation isn’t just about earnings multiples; one also needs to consider assets. This aspect of valuation can be quite contentious, particularly for unusual assets.

Not so ‘Black and White’

The value of the late Michael Jackson’s estate has recently sparked a major dispute.

In particular question is the value of a trust that owns the rights to some of the biggest hits from MJ and the Beatles. The IRS valued the trust at $469 million, but the estate told them to ‘Beat it’, valuing the trust at zero!

Not your average auction

Closer to home, the contents of a modest Cambridge semi owned by one Roger Keith Barrett attracted global interest when put up for auction.

Of course, the previous resident was better known as Syd Barrett, the reclusive founding member of Pink Floyd. The auction saw staggering offers made for some frankly useless stuff. An artificial Christmas tree for £800 anyone? How about a homemade plywood breadbin for £1,400?

Feature

Market multiples: Use with care!

In the context of profitable trading companies, a common method for valuation is the use of earnings multiples, and the application of market derived multiples.

comparable company is in fact closely held with only a small float of shares? Will its market capitalisation and implied multiple be meaningful?

The aim of this approach is to arrive at a market multiple that is meaningfully comparable to the business being assessed.

This should be done with caution; remember

So next time you’re reading a valuation report, ask yourself: Has the valuer given serious thought to the market multiple approach? Or just reached for the Financial Times?

Remember that multiples are only indictors... they don’t explain value. that multiples are only indicators of value – they don’t explain value.

A good business valuation would use market multiples alongside a number of different methodologies, with the aim of corroborative results. At the very least, the report should rationalise why some techniques were discounted.

Working with market multiples presents a number of issues, for example: 1. Difficulty of finding a sufficiently comparable business 2. Need to adjust for the relative scale of the businesses 3. Adjustment required between quoted and unquoted businesses Valuers lessen their chances of finding the best comparable business by failing to search beyond data easily available on FTSE quoted companies. What if the best comparable company has a NASDAQ quote, or is listed in Taiwan? (As is often the case with technology companies.)

The data can also be misleading. What if the

PEM Valuations

Business valuations for your clients

From time to time, your clients may ask you how to value their business.

or tax reasons. Yet for many advisors, valuations are “not the day job”.

Such requests could be triggered by a shareholder exit, disputes, restructuring

This is where the PEM Valuations Team can help.

Why refer your clients to us?

Focused

Flexible

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

We offer both long and short form valuation reports, and our fee levels vary depending on the complexity, nature and purpose of the report required.

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.

For more information please visit our webpage www.pemcf.com/valuations.

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

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 728 280 lake@pemcf.com

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