Australian Private Business Values – latest report and key findings
The latest bizexchange index report on Australian private business value is show some interesting results and highlights the need to keep a close eye on the market for business sales in Australia. Before we analyse the numbers a couple of key findings shed light on key issues for business owners as they prepare for an exit or succession plan, which includes selling their business. The rebound in market sentiment in the second half of 2009 looks like more of an aberration as the net sentiment heads back into negative again. The volume of businesses advertised for sale in June 2011 has skyrocketed to a record high unfortunately at the same time the value of the index simultaneously reached a new record low. The rapid growth in listing volumes is predominantly at the smaller end so for the first time three out of four listings during the quarter have EBIT ratios below two. Also for the first time there are an equal number of listings with and EBIT ratio of less than one as there are with EBIT ratios greater than two.
The premium paid for larger businesses, particularly those in the middle market ($5-$15 million turnover) remain strong. This end of the market is strongly influenced by equity markets with mergers and acquisitions the primary source of buyers. While retiring micro business owners flood the smaller end of the market dragging these prices lower. Over the last 12 months there’s been a steady convergence in the values of business below $5 million in turnover. This reflects the divergences value to businesses seeking private buyers compared to those more likely to be purchased by other businesses and again strongly reinforces the need for strategic exit and succession planning in preparation for sale.
Larger business owners preparing to retire should, if well-prepared, have far more success than those smaller businesses. Australia equity markets are underpinned by the constant flow of superannuation contributions of Australian workers. With the equity raising requirements of the larger Australian businesses readily met by these funds and Australian & international business loans there is a surplus of investment funding. This surplus translates into higher P/E ratios for respected listed companies. Consequently, listed Australian businesses will continue to have the opportunity to profitably finance their expansion by acquiring privately owned businesses at lower P/E ratios and they have themselves. It is this practice which will underpin the value of larger privately owned businesses. Accordingly businesses in the medium and middle market need to actively consider how to increase their appeal as a potential acquisition target as part of their exit planning and succession strategy.
The numbers are also interesting in terms of the middle market businesses – retail trade for example are seeing very low EBIT multiples of 0.87 turnover below 5 million turnover and 1.39 for turnover between five and 15 million, whilst at the higher end property and business services are achieving multiples between 3.35 and 4.12 for larger businesses. Many micro businesses (turnover less than 500 K) are failing to achieve a multiple of one with several industry sectors between 0.58 and 0.92. Again the premium for size becomes lastly important.
The percentage of distribution of listings by EBIT value also reveals an interesting trend with over 24% listed at less than 1, 50% between one and 2, 20% between two and three and only 6% above three times multiple. In terms of business value as a multiple of EBIT the vast majority of businesses during the quarter sat between two and three times multiple of EBIT.