Winter 2017
Valuation Snapshot
Welcome to our eleventh 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.
Pricing has been stable this quarter A downturn in the PCPI being matched by an uptick in the Argos index. Argos Soditic’s drill down analysis shows the growth being driven by lower mid-market deals where prices were up 5.6% compared to a 3% fall at the upper mid-market end.
They also see a comparison to 2006 with a record index driven by large increases in prices paid by strategic buyers mirrored by the continued rise of the stock market.
Key valuation indices Q3 2008 to Q3 2017
Why two experts might come up with different valuations Two experts appointed to value a business can arrive at different conclusions. The courts sometimes worry that the experts are providing the opinion their clients had wanted and so end up splitting the difference. Experts shouldn’t indulge in advocacy, and in any case shouldn’t two trained and experienced professionals come up with the same answer? There are a number of good reasons why differing opinions may arise.
Reasons for differences ▪▪ Legal guidance Experts can be reacting to different legal guidance.
▪▪ Difference In an ideal world, both valuers would have the same data set. But of course access to data may be unequal. Valuers need to deal with shortfalls in information in a reasonable way, but can only conclude based on the available evidence.
▪▪ Access to management Sometimes the valuer for one “side” in the case is denied the level of access to management granted to the other expert. This is bound to influence the valuation assumptions made.
▪▪ Use of different valuation methods Valuers make judgements as to which of the three main valuation methods to use. The asset approach focuses on assets values, the income approach deals with income capitalisation or discounted cash flow and the market approach uses comparisons with public companies and
with analogue transactions. Valuers need to be aware of their merits and disadvantages.
▪▪ Different judgements, different assumptions Experts providing business valuations must make assumptions and judgements on a wide range of issues, such as: asset methods, earnings methods, forecast assumptions for DCF, public company comparables, analogue transactions, non-operating assets, premia and discounts, and weighting assigned to the different methods.
▪▪ Mistakes One would hope they’ll be discovered and corrected before anyone ends up before a Judge.
What else might influence the court? The court may also be swayed by the relative credibility of the reports and the testimonies of the experts. Also, how compelling the conclusion is in comparison with other evidence? Does it make sense? The PEM Valuations team are also engaged in providing M&A advice to business owners. And so we have the advantage of being able to apply the “gut test” to any valuation opinion – do we believe that someone (subject to the premise of valuations, i.e. not a strategic or special buyer) would pay that amount for the business being valued?
Lake Falconer lake@pemcf.com
Factors to consider when valuing a recruitment company Many recruitment business owners often start-up their companies with an already well-developed exit strategy in place – these strategies frequently conclude with the sale of their business to the highest bidder.
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We are often asked to provide business valuations for recruitment company owners in order to help shape and inform these exit strategies, and we see a number of commonly occurring factors that influence valuation.
Strong management teams: A business that is run on a day-to-day basis by an autonomous management team that is separate from the Vendor tend to generate higher valuations
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Market sector expertise: A large depth of knowledge in a sector, or across a number of sectors, carries intrinsic value to a potential purchaser
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Varied customer base: Having a wide spread of placements with many clients decreases risk for a potential purchaser, hence businesses with this characteristic will attract higher NFI multiples
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Large number of star performers: Consultants are the key assets in recruitment businesses, hence there is always the risk of these “assets” walking out of the door following a change of ownership. Businesses where revenue generation is spread across a number of consultants are valued highly
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Well established back-office: When a potential buyer approaches a business with solid systems and procedures in place, it greatly increases confidence in the business and enhances value
One of the many traditional methods of valuing a business is by applying a multiple to a normalised level of EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation). However, when valuing recruitment businesses, it is industry practice to apply multiples to NFI (Net Fee Income). NFI is seen as a better performance indicator for recruitment companies across the sector, and is calculated as the total placement fees of permanent candidates, the margin earned on the placement of temporary candidates and the margin earned from advertising. For larger recruitment companies, NFI also includes the outsourcing, consulting and pay-roll margin earned by the recruitment process outsourcing function (RPO). Typically, we are seeing NFI multiples of 1.5x – 2x being paid for recruitment companies, many of which are displaying the following characteristics: •
Growth: Businesses that can demonstrate increasing profitability, as well as top-line growth, over the medium term are usually valued at a higher rate than a business
with a flat or declining trading history
Philip Olagunju philip@pemcf.com
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.