Bizval Indicator Report
for March 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, 31 March 2019.
Bizval Indicator rebounds in March.
After last quarter’s dramatic fall, the Bizval indicator has clawed back some of the recent losses. An indicator of 329 was recorded for the March 2019 quarter, a year-on-year increase of 3.9% from 317 recorded in March 2018.
Average Price Earnings (P/E) ratios of small ASX listed companies rose solidly in the quarter. This made a significant contribution to the growth of the Bizval Indicator in March 19. This was however somewhat tempered by further growth in the volume of businesses listed for sale. This supports our previously reported research that suggests the supply of businesses for sale is far outweighing the demand, leading to lower multiples being agreed upon in current market activity.
Small business finance rates remain stable, albeit it at a significant premium to property interest rates.
At Bizval, we were engaged to value a growing number of start-up business this quarter. The main purposes of these start-up valuations were capital raising, shareholder buy-outs and restructures.
General Economic Indicators
|INDICATOR||NOW||1 YEAR AGO||MOVEMENT|
|All Ordinaries Index AU (1)||6,262||5,876||6.73%|
|RBA Cash Rate AU (2)||1.50%||1.50%||0.00%|
|GDP AU (3)||2.30%||2.40%||-0.10%|
|Dow Jones Industrial Average USA (4)||25,929||24,103||7.58%|
|Inflation Rate AU (5)||1.80%||1.90%||-0.10%|
|Unemployment Rate AU (6)||4.90%||5.60%||-0.70%|
(2) Source: Reserve Bank of Australia, 2 April 2019
(3) Source: Australian Bureau of Statistics, 31 December 2018 (seasonally adjusted, yearly)
(4) Source: New York Stock Exchange, 29 March 2019
(5) Source: Australian Bureau of Statistics, 31 December 2018 (headline, yearly)
(6) Source: Australian Bureau of Statistics, 28 February 2018
The All Ordinaries Index (Australian Stock Exchange)The All Ordinaries posted significant gains in the March 19 quarter. Growing by 9.6% on a quarterly basis and 6.7% over the previous 12 months. Interestingly, March 2019 marks 10 years since the beginning of the Bear market which saw global stocks rebuild from the global financial crisis.
RBA Cash RateOnce again there is not much that can be said about the RBA Cash Rate, as most of our readers are aware it hasn’t moved since August 2016 when it was reduced from 1.75 to 1.50%. At its meeting on 2 April, the RBA stated that the outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.
Unemployment RateSeasonally Adjusted unemployment rate decreased 0.1% to 4.9%, its lowest level in over seven years. Seasonally Adjusted Employment increased 4,600 to 12,763,400 persons. Full-time employment decreased 7,300 to 8,742,700 persons and part-time employment increased 11,900 to 4,020,700 persons.
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.