Bizval Indicator Report
for September 2019We 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 September 2019.
Bizval Indicator posts moderate gains.
The Bizval Indicator has recorded some modest gains in the September 2019 quarter. The indicator now stands at 324, representing an increase of 1.9% over the past year.
It has taken several years for small business lending rates to decline, however following the three recent interest rate cuts by the RBA, all four of the big banks have now reduced their business interest rates. The full amount of the cuts have not been passed onto business loan borrowers, which is a similar situation to home loan borrowers.
Average Price Earnings (P/E) ratios of small ASX listed companies have remained stable. Our own internal valuation multiples have increased slightly this period.
Interestingly, the number of SME’s listed for sale decreased in September 2019. Our research indicates there are currently 2.4% less businesses for sale than this time last year. However, the volume of businesses ‘on the market’ remains at historically high levels.
Throughout the September 19 quarter, our valuations have covered a wide range of industries, with Tech Start-Ups, Wholesale and Professional Services businesses featuring prominently.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,801||6,326||7.52%|
|RBA Cash Rate AU (2)||0.75%||1.50%||-0.75%|
|GDP AU (3)||1.40%||3.40%||-2.00%|
|Dow Jones Industrial Average USA (4)||26,917||26,458||1.73%|
|Inflation Rate AU (5)||1.60%||2.10%||-0.50%|
|Unemployment Rate AU (6)||5.30%||5.30%||0%|
(2) Source: Reserve Bank of Australia, 2 October 2019
(3) Source: Australian Bureau of Statistics, 30 June 2019 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 30 September 2019
(5) Source: Australian Bureau of Statistics, 30 June 2019 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 31 August 2019
The All Ordinaries Index (Australian Stock Exchange)The All Ordinaries continues to impress with its unprecedented climb this year. It closed September 2019 7.5% higher than September 2018. In July 2019, the index hit its highest ever level of 6,928. While it has eased slightly since then, it still remains at historically high levels.
RBA Cash RateLast quarter we reported the RBA’s rare double cuts in June and July. They backed that up with another 0.25% cut in October 19. In its statement the board said it “took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target”.
Gross Domestic ProductThe Australian economy grew 0.5% per cent in seasonally adjusted terms in the June quarter 2019, taking the yearly figure to 1.40% according to figures released by the Australian Bureau of Statistics. This was a softer than expected result, with the ABS stating “Government spending was the main contributor to growth in domestic final demand, reflecting ongoing delivery of services in disability, health and aged care.”
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 RatiosSmall 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 RatesBizval 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 SaleBizval undertakes a review of the volume of businesses listed for sale across Australia, taking into account any movements in this number.
Bizval MultiplesWe 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 RateThe 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.