mergers & acquisitions 45
Valuing businesses in a volatile environment
Whether acquiring or disposing of a business or setting up share incentivisation schemes, Tania Wilson, leader of PwC’s valuations practice in the South East explains why caution should be taken when valuing businesses in the current economic climate
Assessing business value for these purposes is vital to safeguarding returns for shareholders. But how can business leaders assess value in such a volatile environment?
Typical approaches taken when assessing value include earnings multiples, such as EBITDA, comparison to similar recent transactions or even a discounted cashflow methodology. However, in a volatile economic environment the use of these approaches maybe more difficult. For instance, it may be that ‘rules of thumb’ which have been used historically to determine an appropriate earnings multiple no longer apply.
Benchmarking a relevant earnings multiple is also currently more difficult, given there are fewer transactions with which to base your assessment. Adopting a forecast cashflow approach also
has its challenges given the inability to forecast with any certainty both the business and the industry as a whole. There may be other external influences which need to be factored in to your assessment of value such as the cost or availability of funding which will impact any returns and, in turn, the value.
The key to unlocking these methodologies in such volatile conditions is to consider the drivers of that volatility and how they affect a particular business or sector. Take for instance, the eurozone crisis. An export- driven company with particular exposure to the eurozone will be more heavily impacted than a counterpart in the same sector trading mainly with the US. This will inevitably distort earnings multiples for companies, perhaps even within the same sector, where exposure to Europe varies
across competitors. It is therefore important to understand the drivers behind earnings multiples and consider whether they are relevant for the business being valued.
Consideration should also be given to longer-term expectations. The recession is turning out to be longer and deeper than many commentators had originally predicted. It now seems likely that we won’t return to pre-crisis levels of growth in the UK for several years. Business leaders should think about the consequence of this on their longer-term plans for the business and the levels of growth which may be achievable.
In general, given the additional uncertainty in using any valuation approach in today’s economic climate, we would strongly recommend the use of more than
one valuation approach when assessing value. It is also essential to factor in market volatility and potential overreaction reflecting current investor sentiment, which may not be relevant if considering a longer term basis of value.
Details: Tania Wilson 0118-9383546
tania.a.wilson@uk.pwc.com www.pwc.co.uk/valuations
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persuade us otherwise, are still not lending. Even when they do, they aren’t necessarily the ideal bedfellow for an ambitious management team. Even with the most well-intentioned relationship manager fighting your corner, banks still subject businesses to faceless, stringent lending criteria. The banks are the place to go if you want to feel like Oliver Twist, bowl in hand, begging for more. Their teams are made-up of managers, not risk-takers or entrepreneurs.
Think about it. A bank is only ever really interested in the worst-case scenario. That means security for its lending, proof of your ability to repay and getting its money back with interest, not the growth of your business per se. A private equity house has a vested interest in helping your business grow and become more valuable and profitable.
Then, of course, there are alternatives like the government’s much heralded Business Growth Fund (BGF) which was launched to help kick-start the SME sector by making £2.5 billion available to those needing capital to grow.
The idea is sound enough and the BGF has worked hard to invest in many businesses but it is only offering investments of £5 million plus, which is an already over-crowded sector of the market.
The funding gap has not been closed.
Which brings us full circle.
My partners and I did our homework before we set up WestBridge Capital. We knew that there was a shortage of funding available to businesses needing smaller investments of
THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2012
www.businessmag.co.uk
between £1m and £5m. Events have proved us right. Since we raised our £30m SME Fund, we’ve already supported four successful businesses that were having ambitious growth plans strangled by a lack of funding.
They all agree that the fresh capital injection is just one part of the equation. The support, advice, wisdom and experience they’ve had on tap has added at least as much additional value to their business as their improved liquidity.
So, the next time you hear someone spouting vitriolic clichés about the shortcomings
of ‘private equity’, put them straight. All equity houses are not the same.
For some, it’s about so much more than just money.
It has
a deeper purpose - growth, which as everyone agrees, is desperately needed in our SME- based economy.
WestBridge Capital is a private equity house with £30m to invest in established, profitable and ambitious SMEs.
Details:
www.westbridgecapital.co.uk
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