Bizval Indicator Report
for March 2022
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, 31 March 2022.
Business Valuation Multiples down 4.5%
The Bizval Indicator figure for March 2022 suggests business valuation multiples have decreased by 4.5% over the past year. An Indicator of 339 was logged in March 2022, a decrease from 355 recorded in March 2021. This fall follows the December 2021 quarter’s easing of 2.5% on a year-to-year basis.
Our research indicates business valuation multiples experienced a strong period of growth over the 2021 financial year, which is broadly in line with other asset classes such as property and shares. With this in mind, we believe (at this stage) the easing over the past two quarters should be viewed as a ‘correction’ rather than as anything too concerning.
Two of the four factors used to build the Indicator contributed to its fall during the quarter: P/E ratios of ASX small-caps and the volume of businesses listed for sale. Conversely, bank interest rates and evidence of actual valuation multiples remained relatively stable.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||7,790||7,017||11.02%|
|RBA Cash Rate AU (2)||0.10%||0.10%||0.00%|
|GDP AU (3)||4.20%||-1.10%||5.30%|
|Dow Jones Industrial Average USA (4)||34,678||32,982||5.14%|
|Inflation Rate AU (5)||3.50%||0.90%||2.60%|
|Unemployment Rate AU (6)||4.00%||5.80%||-1.80%|
(1) Source: Australian Stock Exchange, 31 March 2022
(2) Source: Reserve Bank of Australia, 5 March 2022
(3) Source: Australian Bureau of Statistics, 31 December 2021 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 31 March 2022
(5) Source: Australian Bureau of Statistics, 31 December 2021 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 28 February 2022
The seasonally adjusted unemployment rate fell to 4.0% in February 2022, the lowest unemployment rate since August 2008, according to data released by the Australian Bureau of Statistics (ABS).
Bjorn Jarvis, Head of Labour Statistics at the ABS, said: “With employment increasing by 77,000 people and unemployment falling by 19,000, the unemployment rate fell by 0.2 percentage points, to 4.0%.”
“This is the lowest unemployment rate since August 2008 and only the third time in the history of the monthly survey when unemployment was as low as 4.0% (February 2008, August 2008, February 2022). Lower unemployment rates occurred in the series before November 1974, when the survey was quarterly. (Source: ABS)
Australian Gross Domestic Product (GDP) rose 3.4% in seasonally adjusted chain volume terms in the December quarter 2021, according to figures released by the Australian Bureau of Statistics (ABS) in early March.
Sean Crick, Acting Head of National Accounts at the ABS, said: “After experiencing a fall of 1.9% in the September quarter due to a number of state lockdowns, the Australian economy recovered in the December quarter, growing 3.4% and surpassing the pre-Delta June quarter 2021 level.”
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.