What considerations should I take into account in light of Covid-19 onset in the UK when using BVB Insights 2020 edition in benchmarking a company I am valuing?
All valuations are conducted as at a specific date, and it is important to understand when the onset of Covid-19 in the UK was known or knowable, and therefore whether you need to factor the impacts into your valuation.
If you are using the multiples and insights in the BVB Insights 2020 edition, which relate to transactions which completed in the year ended 31 December 2019, to benchmark the companies you are valuing you will need to consider the impact Covid-19 has had on the business, the impact on its cashflows and margins (both short and long term), and the impact on its marketability.
Our BVB Insights 2020 contains some information as to when the onset was known or knowable in the UK and factors you may want to consider.
How will the uncertaintity created by the EU referendum outcome impact on M&A in the UK and multiples paid?
The EU referendum result has created economic uncertainty and the impact on M&A in the UK and the resulting multiples paid to acquire UK businesses is unclear. The M&A environment will likely remain uncertain until the terms of the UK exit have been agreed and the details of the ongoing business relationship between the UK and the EU decided. How long this will take is impossible to foresee at this time.
It is difficult to predict how Brexit will impact UK businesses, their long-term profitability and multiples paid in transactions. Impacts will vary across industries. The first indications of these will be illustrated in our 2017 edition. While we cannot see into the future we know that as business valuation professionals we always need access to reliable and well-researched historic transaction multiples.
How many transactions do you cover each year?
The number of transactions we cover annually depends on the M&A activity in the year, and the extent of deal information that is publicly available. We have been researching since 2011, and on average we derive multiples for between 250 to 325 transactions annually.
Are you able to name other clients that have purchased/used this publication?
We have clients in the Top 50 Accounting Firms, a number of sole practicioners who are ex Big 4 partners, and some Directors in the Second Tier accounting firms.
Why don’t you use PE?
PE multiples are not suitable when evaluating prices paid, and thus multiples paid, for controlling interests of a company. By their very nature PE multiples represent minority interest multiples of the “Equity” value of a business, as opposed to the controlling interest of the “Enterprise” value. When valuing a controlling interest, the acquirer has control over the financing structure and therefore it is important to derive the multiples that represent that control, being the EV/EBITDA multiples.
The earnings used (i.e. EBITDA) should also represent the earnings that are available to the controlling interest, and should be independent of the financing structure. Earnings in a P/E ratio represent the earnings available to the “equity” holders after the financing costs, and thus do not represent “control” cash flows.
How does the data compare with the information available from other databases such as PERDa, which also gives Enterprise Value multiples?
Our data is unique in the sense that we provide the average multiples paid for each of the c50 industries we have segmented. Furthermore from 2014 we have provided details on every transaction including:
- Target and Buyer Name
- Key Buyer Motivation
- Normalised Revenue, EBITDA, EBITDA margin
- Normalised Revenue and EBITDA Multiples
As a result you get never before seen in the UK comprehensive “bible” of private company transactions. It is invaluable for professional advisers as a one-stop source to quote from when advising clients.
PERDa has very limited use in this regard since it does provide an analysis of what is driving multiples on a more meaningful level. Rather it provides average multiples for an average transaction size.
This is too high level to provide a meaningful benchmark for a company in a particular industry. For example over the past year (2012 year) we noted that Manufacturing companies for example sold at divergent multiples irrespective of size. We noticed the strong multiples are attached to the strong branded manufacturers, and low multiples for the “Widget” type manufacturers. A further example is in the Retail industry, interestingly not all Retail is dead, as Online Retail and Shoe Retail (particularly strong brands) have sold for very high multiples over the past few years (of particular note were Kurt Geiger and Jimmy Choo) whereas Apparel Retail has not - although an exception to this is the luxury end of the market and the strong high end brands. In addition we noticed strong multiples paid for companies in industries you would least expected because of Asian buyers wanting to enter the European market. This is the type of analysis we provide to you, that is something that PERDa cannot.
Could you please let us know what file format this is in and how it’s licensed, i.e. can it be put on more than one computer?
The file is in downloadable PDF format. More than one user is able to access the document from the same office location, however sharing is not permitted between offices in different locations.
You state the key point that the multiples are based on normalised data and have given some of the adjustments to arrive at normalised EBITDA but nowhere does it state that directors’ remuneration is adjusted. Is this one of the adjustments that is made as well, and if so how is an appropriate adjustment calculated? Are you able to obtain the full information from the statutory accounts together with details of the directors’ remuneration and the number of directors who were in an executive capacity, in particular where there are shareholder/directors, and remuneration is via salary/bonus and /or dividend?
This is an excellent question and in fact we specifically looked into this when we first started doing our research in 2011 to see if it was possible to do this. We found that it is not possible to make this normalisation adjustment due to the lack of information available on the remuneration in relation to private companies. One of the strengths or our research however, is that we calculate normalised EBITDA to the extent that is possible based on all information available in the public domain.
Our founders have many years experience in Valuations particularly in a Forensic context, and thus the multiples we present are the most accurate based on the publicly available information (both as disclosed by the Target and Acquirer).
Our experience has been that many databases report different multiples for the same transaction, because for example some may not include all the consideration (fail to include the debt assumed in the transaction), some may base their profit/EBITDA on outdated earnings figures, adequate normalisation adjustments are not made, some include all/part/none of the deferred consideration.
We have seen this happen when comparing data from Mergermarket, Factset, Capital IQ, Bloomberg (whose strength is not in reporting private company multiples), Corpfin, and a number of others. We eliminate this inconsistency by going straight to the most reliable sources and thoroughly researching each deal.
There will be companies included in those transactions in excess of ￡500,000 that file small company abbreviated accounts and therefore much of the information required to normalise EBITDA will not be available in the public domain. Where this is the case how is this addressed?
We will research every possible document available regarding the acquisition, and do not solely rely on the accounts lodged with Companies House. Often details are provided in the acquirer's accounts or press releases etc. In the case of abbreviated accounts we do not include the multiples in our data unless we find corroborating evidence.
This would also apply to the revenue figure, which would not be available in small company abbreviated accounts.
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Below are links to articles we think you may find useful.
The valuation implications of the UK High Court decision in the Stabilus case.
Valuing a minority interest: Have you considered all methods and factors?