Bizval Indicator Report

for September 2018

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.

Bizval Indicator

NOW 1 YEAR AGO MOVEMENT
3.18 3.40 -6.4%

Source: Bizval, 28 September 2018.

Bizval Multiple Indicator fall wipes out gain of previous quarter.

An indicator of 3.18 was recorded for the September 2018 quarter, a decrease from 3.45 for the quarter ending June 2018.

Year-on-year the indicator has decreased by 6.4% mainly due to changes in two of the four components comprising the multiple as data on business finance rates and the number of businesses listed for sale remained steady over the last quarter:

  • Falling Price Earnings (P/E) ratios of small cap listed companies
  • Lower values for our own valuation earnings multiples

At Bizval we have again experienced steady numbers of valuations with an increase in the proportion of valuations for larger businesses during the quarter.

General Economic Indicators

INDICATOR NOW 1 YEAR AGO MOVEMENT
All Ordinaries Index AU (1) 6,326 5,744 10.12%
RBA Cash Rate AU (2) 1.50% 1.50% 0.00%
GDP AU (3) 3.40% 1.80% 1.60%
Dow Jones Industrial Average USA (4) 26,548 22,405 18.09%
Inflation Rate AU (5) 2.10% 1.90% 0.20%
Unemployment Rate AU (6) 5.30% 5.60% -0.30%

(1) Source: Australian Stock Exchange, 28 September 2018
(2) Source: Reserve Bank of Australia, 3 October 2018
(3) Source: Australian Bureau of Statistics, 30 June 2018 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 28 September 2018
(5) Source: Australian Bureau of Statistics, 30 June 2018 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 31 August 2018

The All Ordinaries Index (Australian Stock Exchange)

The ASX All Ordinaries Index held ground in the September 2018 quarter finishing 10% higher than in September 2017 at 6,326 points. The benchmark accounts for 88% (March 2017) of the Australian equity market containing the 500 largest ASX listed companies by market capitalisation.

Gross Domestic Product (Australia)

The latest national accounts confirmed that the Australian economy grew strongly over the past year, with GDP increasing by 3.4 per cent growing by 0.9% in the September quarter. Our household final consumption expenditure increased by 0.7% during the quarter, contributing 0.4 percentage points to GDP growth. Other contributors to the positive GDP result included compensation of employees at 0.7% and net exports 0.1%.

Unemployment Rate

The Unemployment rate decreased to 5.3% with the participation rate remaining steady at 65.6%, with employment increasing by 29,000 to 12,620,700 and Unemployment decreasing 2,700 to 711,900.

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).

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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.

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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.

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Bizval Multiples

We review an average of the multiples used in our business valuations and combine these with multiples from actual business sales (where available).

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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.

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