CURRENT INDICATOR REPORT ON SME VALUES
for December 2021
We like to think of the Bizval Indicator as a ‘barometer’ of SME valuation multiples providing a perspective of the value of Australian small-to-medium sized businesses.
Unlike listed companies, the sale prices of SME’s are not readily available. The Bizval Indicator helps monitor movements in the drivers of SME values.
The Bizval Indicator is derived from key drivers of SME values and is then reviewed in the context of a basket of general economic indicators.
|NOW||1 YEAR AGO||MOVEMENT|
Source: Bizval, 31 December 2021.
Business values retreat
Following a sustained period of growth, the latest Bizval Indicator analysis suggests SME business valuations are beginning to retreat.
An indicator of 353 was recorded in December 2021, representing a decline of 2.5% from 362 recorded in December 2020.
A sharp drop in the P/E Ratios of small ASX listed companies contributed to the decline.
Business lending rates advertised by the big four banks remain unchanged from December 2019.
Over the quarter we were engaged to undertake business valuations for a broad range of purposes, with restructures, merger & acquisition, taxation and family law all featuring prominently. Businesses in the Manufacturing, Wholesale and Professional Services industries were among the most popular over the quarter.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||7,779||6,851||13.55%|
|RBA Cash Rate AU (2)||0.10%||0.10%||0.00%|
|GDP AU (3)||3.90%||-3.30%||7.20%|
|Dow Jones Industrial Average USA (4)||36,338||30,606||18.73%|
|Inflation Rate AU (5)||3.00%||0.70%||2.30%|
|Unemployment Rate AU (6)||4.60%||6.80%||-2.20%|
(1) Source: Australian Stock Exchange, 31 December 2021
(2) Source: Reserve Bank of Australia, 6 December 2021
(3) Source: Australian Bureau of Statistics, 30 September 2021 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 31 December 2021
(5) Source: Australian Bureau of Statistics, 30 September 2021 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 30 November 2021
Australian Gross Domestic Product (GDP) fell 1.9% in seasonally adjusted chain volume terms in the September quarter 2021 and was up 3.9% through the year, according to figures released by the Australian Bureau of Statistics (ABS) in December 2021.
Acting Head of National Accounts at the ABS, Sean Crick said: “Domestic demand drove the fall, with prolonged lockdowns across NSW, Victoria and the ACT resulting in a substantial decline in household spending. The fall in domestic demand was only partly offset by growth in net trade and public sector expenditure. GDP in the September quarter 2021 was 0.2% below the December quarter 2019 pre-pandemic level.”
The Consumer Price Index (CPI) rose 0.8% in the September 2021 quarter, according to the latest data from the Australian Bureau of Statistics (ABS).
Head of Prices Statistics at the ABS, Michelle Marquardt said the most significant price rises in the September quarter were new dwellings (+3.3%) and automotive fuel (+7.1%).
“Construction input costs such as timber increased due to supply disruptions and shortages. Combined with high levels of building activity, this saw price increases passed through to consumers”, said Ms Marquardt.
“Rising fuel prices also contributed to the September quarter CPI increase, with the CPI’s automotive fuel series reaching the highest level in its half-century history.”
Rents also rose (+0.2%), with rises in most cities partially offset by falls in Sydney and Melbourne.
Drivers of SME Values
The Bizval Indicator is calculated using a proprietary formula. We research, monitor and evaluate the following components to arrive at the result.
ASX Small Cap P/E Ratios
Small Capitalisation companies have greater similarities to private SMEs than large cap stocks. Bizval reviews the mean and median price earnings (P/E) ratios of companies with market capitalization of between $20 million and $200 million. We adjust these figures to align them more closely with private SMEs by reducing the P/E ratios to account for differences in size, key-person dependence and ability to easily buy or sell (liquidity).
Business Loan Interest Rates
Bizval monitors the advertised interest rates of Australian major banks for business loans. Using an average of these rates we then add a risk margin (commonly added to the base rate by banks when lending to small businesses). We also add a hypothetical margin for the SME proprietor to reflect their return on investment. This interest rate is then converted to a multiple.
Businesses for Sale
Bizval undertakes a review of the volume of businesses listed for sale across Australia, taking into account any movements in this number.
We review an average of the multiples used in our business valuations and combine these with multiples from actual business sales (where available).
In addition to the four drivers of SME values, the Bizval Indicator is evaluated in the context of six national / international General Economic Indicators.
The All Ordinaries Index (Australian Stock Exchange)
The ‘All Ords’ is the oldest index of shares in Australia, dating from 1980. It is derived from the share prices of 500 of the largest companies listed on the Australian Securities Exchange (ASX).
Reserve Bank of Australia Cash Rate
The RBA sets the target ‘cash rate’, which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations.
Gross Domestic Product (Australia)
GDP is a monetary measure of the market value of all final goods and services produced over a defined period of time.
Dow Jones Industrial Average (USA)
The ‘Dow’ is a US stock market price-weighted index monitoring the share trading performance of 30 large, publicly owned American-based companies.
Inflation Rate (Australia)
The Consumer Price Index (CPI) measures the average change over time in the prices paid by Australian households for a fixed basket of goods and services.
Unemployment Rate (Australia)
The proportion of unemployed persons in the labor force is seasonally adjusted to take account of changes in demand for agricultural labor, students seeking employment after completing education, and so on.
An independent business valuation compiled by a professional can help. Contact BIZVAL or order your business valuation today.