Bizval Indicator Report
for June 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 June 2019.
Bizval Indicator holds onto gains.
The Bizval Indicator has held relatively stable in June 2019. The latest valuation indicator of 339 is a slight decline of 1.7% from 345 recorded in June 2018. However, it represents a 3% increase on the March 2019 indicator of 329.
For the first time in over two years, small business finance rates have started to ease. Two of the big four banks reduced the small business finance rates in June 2019. After the RBA’s second consecutive official interest rate cut in July, we could soon see the other banks pass on the cuts to business loans.
Average Price Earnings (P/E) ratios of small ASX listed companies remained relatively stable in quarter, as did our own internal valuation multiples.
The number of businesses listed for sale decreased slightly in June 2019, however still remain at dramatically high levels. As we have been reporting for almost a year now, our research suggests the supply of businesses for sale far outweighs the demand, leading to lower multiples being agreed upon in current market activity.
During the June 2019 quarter we valued a rising number of businesses for restructuring purposes. These valuations were referred by Accountants to satisfy independence requirements of the ATO and Accounting bodies.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,699||6,310||6.17%|
|RBA Cash Rate AU (2)||1.00%||1.50%||-0.50%|
|GDP AU (3)||1.80%||3.10%||-1.30%|
|Dow Jones Industrial Average USA (4)||26,600||24,271||9.60%|
|Inflation Rate AU (5)||1.30%||1.90%||-0.60%|
|Unemployment Rate AU (6)||5.10%||5.40%||-0.30%|
(2) Source: Reserve Bank of Australia, 2 July 2019
(3) Source: Australian Bureau of Statistics, 31 March 2018 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 30 June 2019
(5) Source: Australian Bureau of Statistics, 31 March 2018 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 28 May 2018
The All Ordinaries Index (Australian Stock Exchange)The All Ordinaries continues its remarkable climb, trading at almost unprecedented levels. At the time of writing the index was only 77 points short of its previous high which was set just before the Global Financial Crisis. It has taken more than a decade to return to levels this close to its previous high.
RBA Cash RateIn its first move in almost three years, the RBA cut the official rate by 25 basis points in June 19. It then backed that up with another cut of 25 points in July, bringing the official cash rate to a record low of 1%. In a statement the RBA said the second cut was needed to “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”
Gross Domestic ProductThe Australian economy grew 0.4 per cent in seasonally terms in the March quarter 2019, taking the yearly figure to 1.80% according to figures released by the Australian Bureau of Statistics. The ABS went on to say “The Australian economy continues to grow but more slowly than our long term average of 3.5 per cent.”
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.