Bizval Indicator Report
for March 2020We 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 2020.
Business Valuations suddenly down 6.5% for the year.
The latest Bizval Indicator figures suggests business valuation multiples have decreased by 6.5% over the past year. An Indicator of 308 was recorded in March 2020, a decrease from 329 recorded in March 2019. This sudden recent decrease in the indicator we attribute to the COVID-9 pandemic and Australia’s rapid shut-down response.
The P/E ratios of small listed companies were the main force driving down the Bizval Indicator, data on our own valuation earnings multiples along with lowering of business interest have cushioned the fall in the year-on-year decrease.
Our research indicates price/earnings ratios of small ASX listed companies decreased by 20% in the March quarter, taking the yearly decrease to almost 25%.
Throughout the March 2020 quarter, our valuations have covered a wide range of industries including many IT Start-ups and Professional Services operations featuring most prominently.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||5,111||6,272||-18%|
|RBA Cash Rate AU (2)||0.25%||1.50%||-1.5%|
|GDP AU (3)||2.2%||2.40%||-0.20%|
|Dow Jones Industrial Average USA (4)||21,917||25,929||-15.47%|
|Inflation Rate AU (5)||1.80%||1.80%||0%|
|Unemployment Rate AU (6)||5.20%||4.90%||0.30%|
(2) Source: Reserve Bank of Australia, 8 April 2020
(3) Source: Australian Bureau of Statistics, 31 December 2019 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 31 March 2020
(5) Source: Australian Bureau of Statistics, 31 December 2019 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 31 March 2020
Dow Jones Industrial Average
The Dow Jones has plunged by almost 20% erasing almost all the gains of the last year from February’s record high, bringing it into bear market territory, ending an 11 year bull market.
Gross Domestic Product
The Australian economy grew by 0.5% in seasonally adjusted chain volume terms in the December quarter 2019 and through the year GDP was up 2.2%
Employment increased 5,900 to 13,017,600 persons with full-time employment decreased 400 to 8,882,200 persons and part-time employment increased 6,400 to 4,135,400 persons.
Unemployment increased 20,300 to 718,600 persons with the Unemployment rate increased 0.1 pts to 5.2%. Note, this was measured in mid-March before many of the announced employee stand downs due to COVID-19.
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.