Bizval Indicator Report
for June 2020We 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, 30 June 2020.
Bizval Indicator down 5% for the year.
The Bizval Indicator figure for June 2020 suggests business valuation multiples have decreased by 5% over the past year. An Indicator of 323 was logged in June 2020, a decrease from 339 recorded in June 2019. This significant fall follows the March quarter’s sudden decline of 6.5%. We continue to attribute this to the COVID-19 pandemic and Australia’s shut-down response.
Two of the four factors used to build the Indicator fell during the quarter: P/E ratios of ASX small-caps and Bizval valuation multiples. Conversely, the supply of businesses for sale dwindled and bank interest rates remained relatively stable.
The greatest contributor to the decline in the Bizval Indicator was the P/E ratios of small listed companies which fell by an average of almost 17%. This was closely followed by our own business valuation multiples which receded 15% over the period. Interestingly, our research shows there were 6% less businesses for sale in June 2020 than the same time last year.
Throughout the quarter ending June 2020 our valuations have covered a wide range of purposes, with internal restructures and family law featuring prominently.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,001||6,699||-10.4%|
|RBA Cash Rate AU (2)||0.25%||1.50%||-1.25%|
|GDP AU (3)||1.40%||3.10%||-1.70%|
|Dow Jones Industrial Average USA (4)||25,813||26,600||-2.96%|
|Inflation Rate AU (5)||2.20%||1.30%||0.90%|
|Unemployment Rate AU (6)||7.10%||5.10%||2.00%|
(2) Source: Reserve Bank of Australia, 8 July 2020
(3) Source: Australian Bureau of Statistics, 31 March 2020 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 30 June 2020
(5) Source: Australian Bureau of Statistics, 31 March 2020 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 31 May 2020
Dow Jones Industrial Average
The Dow Jones, whilst still down 3% for the year, has regained much of its losses from last quarter when it was down 16%. With the alarming COVID-19 situation in the US, it would seem extremely volatile and it is entirely possible that we could see another weakening of the Dow Jones in the near term.
Gross Domestic Product
The Australian economy contracted in seasonally adjusted chain volume terms in the March quarter 2020 and through the year GDP was down to 1.4%
The unemployment rate increased 0.7 percentage points to 7.1% in the latest figures released by the RBA on 18 June 2020. Compared to a year ago, there were 237,900 less people employed full-time and 457,700 less people employed part-time.
Bjorn Jarvis, Head of Labour Statistics at the ABS, said: “The drop in employment, of close to a quarter of a million people, added to the 600,000 in April, brings the total fall to 835,000 people since March.
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.