Bizval Indicator Report
for September 2020
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, 30 September 2020.
Bizval Indicator rebounds, up 4.9% for the year.
The Bizval Indicator has made a somewhat surprising rebound in September 2020. After falling for the past two quarters, the September 2020 quarter has posted a 4.9% year-on-year increase.
Upon further investigation of the elements that make up the indicator, we found that the number of businesses listed for sale has fallen. Anecdotally this had been attributed to many small and medium sized business owners opting to ride out the COVID storm by delaying listing their business for sale.
Further, business lending interest rates have fallen over the past 12 months. All of the big four banks now have headline business loan rates lower than September 2019, with some down as much as 1.40%.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,009||6,801||-11.65%|
|RBA Cash Rate AU (2)||-0.25%||0.75%||-0.50%|
|GDP AU (3)||-6.30%||1.40%||-7.70%|
|Dow Jones Industrial Average USA (4)||27,782||26,917||3.21%|
|Inflation Rate AU (5)||-0.30%||1.60%||-1.90%|
|Unemployment Rate AU (6)||6.80%||5.30%||1.50%|
(1) Source: Australian Stock Exchange, 30 September 2020
(2) Source: Reserve Bank of Australia, 7 October 2020
(3) Source: Australian Bureau of Statistics, 30 June 2020 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 30 September 2020
(5) Source: Australian Bureau of Statistics, 30 June 2020 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 31 August 2020
Gross Domestic Product
Australian Gross Domestic Product (GDP) fell 7.0 per cent in the June quarter, the largest quarterly fall on record.
The combined effect of the pandemic, and the community and government responses to it, led to movements of unprecedented size, not only in GDP but also in many of the other economic aggregates in the June quarter National Accounts.
Head of National Accounts at the ABS, Michael Smedes, said: “The global pandemic and associated containment policies led to a 7.0 per cent fall in GDP for the June quarter. This is, by a wide margin, the largest fall in quarterly GDP since records began in 1959.”
The Consumer Price Index (CPI) fell 1.9 per cent in the June 2020 quarter according to the Australian Bureau of Statistics (ABS).
Chief Economist for the ABS, Bruce Hockman said: “This was the largest quarterly fall in the 72 year history of the CPI.”
The June quarter fall was mainly the result of free childcare (-95.0 per cent), a significant fall in the price of automotive fuel (-19.3 per cent) and a fall in pre-school and primary education (-16.2 per cent), with free pre-school being provided in NSW, Victoria and Queensland.
Mr Hockman said: “Excluding these three components, the CPI would have risen 0.1 per cent in the June quarter.”
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.