Here’s a quote on the current 4Q state of the UK private equity marketplace that explains the disparity in valuation expectations held by investors, owners, financial analysts, and those concerned about closely held businesses. Answering the question for last week’s Enterprise Times, Cavendish Corporate Finance LLP partner Anthony Platt explains why PE firms are still paying multiples of 10X or more on turnover to buy assets from other PE firms:
Private Equity have been the biggest buyer of PE assets for some time in the UK mid-market. They love it. If you can find a 90%, recurring revenue business, which has got £10 to £30 million in revenue, is profitable, and seeing 20% to 50% growth, you could sell it ten times over.
We don’t dispute this statement, and Platt points to the sale of CaseLines to Thomson Reuters, or another sale of the wealth management ‘platform,’ Intelliflo to Invesco.
Still, these FT-reported big deals cause the following problems for business valuers:
- The reason these deals get such high multiples is there aren’t any available companies that actually match the description above.
- Every small-business owner who reads about these deals driven by the need to put money into play rather than by financial fundamentals ignores the 50% growth, 90% retention metrics and becomes convinced that their mobile phone repair enterprise is worth 10X.
- When disputes arise (whether matrimonial, tax, or commercial), one side is likely to quote these well-publicized deals as evidence that they’ve been victimized, again ignoring true sector economics.
- Business valuers accept the fact that any terminal growth rate above perhaps 5% is suspicious. The projections required to earn a payout at a 10X multiple often have terminal growth rate assumptions well above 15%. It’s never happened yet.
- When PE buys, their liquidity (particularly debt liquidity) is practically infinite. Try to get your client’s neighbourhood bank to loan their family business 10X revenues.
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