Chris Brazier gives a business valuation update, looking at profit multiples used in the valuation of private companies and how this has been impacted since the Brexit vote
Being in the business of helping clients buy and sell companies means that I am always very interested to see the outputs from private company valuation data.
As a rule information on valuation multiples involving private companies is notoriously difficult to ascertain due to deal terms and prices often not being disclosed to the market. Furthermore underlying profitability of the businesses being acquired is rarely publically available.
Indexes analysing the available information are published. The key is to know how to interpret the outputs from these indexes. It’s also important to understand that they are best used as a guide only when trying to value your business.
Indexes do however provide a good insight into general valuation trends. Two recent publications have given us confidence that the UK Company values are holding relatively stable during an uncertain period. I’ve given a commentary brief on these below:
BDO Private Company Price Index
The PCPI provides the average multiple paid on trade sales each quarter using the price paid by trade buyers and the reported historic profits of the target company. In the quarter to December 2017, PCPI reports that private companies sold on an average multiple of 10.1x their historic EBITDA. This has remained consistent with the indices reported since Q1 2016 with the PCPI fluctuating between 10.0x and 10.7x in the interim period.
Note – this index can inflate the calculated multiple as deals will tend to be based on current or forecast earnings. The average size of deals incorporated in PCPI is £79m.
UK200 Group SME Valuation Index
The UK200 Index is provided by the group’s Corporate Finance members who input data on UK SME businesses transactions on which they have worked. The most recent published results in November 2017 reported a median EV/EBITDA multiple of 4.2x. This represents a fall from the 4.8x reported in the 2016 edition, continuing a slight downward trend noted since the EU referendum. However, the average EV/EBITDA reported an increase from 5.6x to 6.2x – though this was skewed by one high multiple deal.
Note – this index uses multiples calculated from the adjusted profits known to having been used in the transactions. As a result it will tend to show a more realistic view of multiples used in transactions of this size. The average size of deals incorporated is £3.4m.
So what about me and my business?
Despite a slight drop off in the headline number of the deals reported, for quality and well prepared private companies, the M&A market in the South East continues to thrive. Despite this, smaller businesses (specifically those with an EBITDA under £1m) do appear to be attracting lower profit multiples. Partly likely due to buyers raising concerns over their ability to drive growth in this current political and economic climate.
For any SME business owners reading this, thinking of selling within the next 3 years; it is important you are aware of the levers you can pull to maximise your profit multiple. Although there are factors outside your control that will affect value, there are many more factors that are controllable including:
- The quality of second tier management team
- Succession plans in place
- The quality of financial information available
- The diversity of your customer base
- The range of products and services offered
You need to think through all of these very carefully. The impact of any changes made can often take a number of years to been seen. In conclusion, as a seller, the sooner this process is started, the stronger your position will be when the business comes to market.