AUSTRALIAN PRIVATE BUSINESS VALUES - March Quarter 2010

Introducing the BizExchange Index

One of the major impediments to private business sales in Australia is the hidden nature of the market. BizExchange is increasing the liquidity and value of private business by:

  • Raising awareness of the market, and facilitating access to business opportunities through listings on its online marketplace – www.bizexchange.com.au
  • Raising awareness of business values through the publication of the BizExchange Index and the website www.valuemybusiness.com.au

All too often buyer and seller, investor and equity raiser have unrealistic expectations of business values. By publishing the quarterly BizExchange Index we hope that current and potential owners will approach future transfers of ownership with more realistic expectations.

The BizExchange Index is generated from actual vendor data as well as the collation of expert opinion. Values are only included where sufficient data is available.transfers of ownership with more realistic expectations.

The BizExchange Index is applicable to over 95% of businesses in Australia.

The BizExchange Index is published quarterly. This ensures that the valuations are up to date, and also enables ongoing analysis of trends in valuation across various industries.

The BizExchange Index provides a guide to business values based on the earnings multiple for industries and business size. However other factors need to be considered when assessing an individual business. Some of the important factors are:

  • Type of income
  • Profit margins
  • Stability
  • Competitive advantage
  • Industry lifecycle
  • Reliance on owner operator
  • Market fluctuations

A number of these will be more or less important depending on the specific industries and organizations.

Key findings for the March Quarter 2010

  1. Market sentiment has flattened in the March Quarter after skyrocketing in the previous two quarters when the net sentiment rose to its highest level since the survey began in March 2006. The Market sentiment is still very positive, particularly given that the actual price of businesses has been relatively unchanged during the same period.

  2. The volume of businesses for sale has increased substantially in the last quarter, perhaps following the improved market sentiment from previous quarters.

  3. The proportion of listings with EBIT ratios of less than one continues to grow with the number of micro-businesses for sale. Nearly half of all businesses for sale, (with data available), are at selling for prices between one and two times earnings.

  4. More businesses in the mid market ($5-15 million turnover) were listed with a wider range of industries involved.





Trend Analysis

BizExchange has been monitoring Australian Private Business values since March 2006, and publishing the BizExchange Index since September 2006. Over that time there has been significant variance in business values across all industries and business sizes. From March 2007 to December 2008, business values in many sectors almost halved due to an oversupply of new listings combined with worsening business conditions. However the past fifteen months have seen relatively stable values in sharp contrast to publicly listed businesses over the same period.

The premium paid for larger businesses, particularly those in the midmarket (5 to 15 Million turn-over) remains strong. This is likely to increase in through 2010 and 2011 as a buoyant equity market drags these prices higher, while retiring micro-business owners flood the smaller end of the market dragging these prices lower.

The volume of business owners considering putting their business up for sale is expected to continue to increase as the current level is well below the average volume required to transfer ownership from the baby boomers to the next generation as they move into retirement. The substantial increase in volume in the March Quarter may be the start of this growth.

Market sentiment continues to be high, which is encouraging more business owners to list their businesses.

Commentary

The privately owned business market is entering an interesting new phase, with a number of conflicting factors at play.

  • Equity markets in Australia are buoyant after recovering quickly from the Global Financial Crisis but are still tentative about smaller listings.

  • Australia’s immigration policy continues to encourage wealthy immigrants to buy existing Australian companies.

  • Property prices continue to rise, despite being well above long term price/salary ratios.

  • High household debt levels among Gen-X and Gen-Y make them reluctant purchasers of existing businesses.
  • Over 100,000 businesses owned by baby boomers are still to be placed on the market as baby boomers go into retirement.

  • Uncertainty is emerging with looming elections in Australia and the UK, together with unresolved
    problems in Greece and Portugal affecting financial markets.

  • This uncertainty is counterbalanced by the likelihood of a return to “resources boom” conditions, particularly in Western Australia and Queensland.

How these factors play out in the next few years will have a major impact on the market and the financial position of a generation of retirees. Australia’s 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 and International business loans, there is a surplus of investment funding. This surplus translates into higher price earnings 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 price earnings ratios than they have themselves. It is this situation 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 potential acquisition targets of bigger companies as part of their exit strategy.

Wealthy immigrants are another potential source of buyers well recognized by the broker community. Many will look to buy Australian businesses that can link up or downstream from the businesses they may have in their country of origin. Australian owners with businesses actively involved in importing or exporting should consider discussing partnerships with their international customers and suppliers as part of their exit strategies.

The small business owner is likely to be reliant on selling their business to an owner operator. With Gen X and Gen Y unable to access their superannuation savings to purchase their own business, and already heavily in debt due to high housing prices, funding of the business purchase will continue to be an issue. Micro business owners looking to retire may be surprised by how little their business is worth. An increasingly large number of businesses are now selling for less than a year’s earnings. Many may find it more financially rewarding to recruit a gen-x or gen-y partner and invest in their development with a view to a more gradual transition of responsibility and ownership.

Regardless of a businesses sale strategy, businesses will need to be in good health with well maintained and presented accounts if they are to obtain premium prices. Improved economic conditions have seen more potential buyers emerging for good established businesses. However a number of business brokers have reported that some banks are still reluctant to finance the acquisition of well managed businesses.

There is general discontent with banks’ reluctance to finance smaller businesses. Smaller businesses are less attractive to banks because they tend to be less robust than big business and require the same amount of effort and skill on the bankers’ part to process.

Since the GFC, we have experienced severe credit rationing (other than for residential property) which has more impact on small business than modest interest rate rises. Whilst banks are beginning to relax their lending conditions, any negative news such as problems in Greece and Portugal will increase their caution. Locally, the run off of the Government’s stimulus measures could see increasing pressure on small retailers and small hospitality industry participants.

In the immediate future there are indications that there will be an increasing number of distressed sales. Usually this occurs in the early stages of economic recovery or return to buoyant conditions. The increasing number of micro businesses with EBIT ratios of less than one is perhaps an indication of this.On the positive side, infrastructure related businesses (whether direct or indirect) are likely to experience improving conditions over the next year or so.

Overall the conflicting factors affecting values seem to be evenly balanced and therefore it is likely that prices for private businesses generally will be relatively stable for the next quarter or two, barring any unforeseen X factor.



Source The BizExchange Index MARCH QUARTER 2010