Will the ‘Boris Bounce’ increase the value of small and medium-sized enterprises?

BVWire–UKIssue #10-1
January 21, 2020

cost of capital
cost of capital, discount rate, risk analysis, weighted average cost of capital (WACC), equity risk premium (ERP)

In theory, clarification and stabilisation make markets happy, so the current road map to exit should encourage investors. Most also feel that the UK’s regulatory regimes, programmes, and taxation policies will support listed company values—and that the SMEs will follow. Other commentators hope for a lift during 2020 as the government spends more, particularly in the north and Midlands, where some Labour voters turned Conservative rather than vote for Jeremy Corbyn (the rail network and the NHS look to be prime beneficiaries, along with a new energy and climate change department, of the extra spending when the new budget is presented next month).

What does it all mean for small-business valuations? First, analysts who increased their UK cost of capital conclusions because of Brexit risk (the FT and others have dubbed this the ‘Corbyn discount’) will need extra research to continue. Other factors that will impact business valuations completed for SME clients:

  • Many business valuers are lowering their long-term tax rate assumptions for SMEs;
  • The ‘new normal’ (lower long-term growth and higher risk premia) that BVR (and most others) considered three years ago (here’s one example) cannot be assumed;
  • Interest rates’ risk for small businesses has not developed, as many feared, so the cost of debt remains lower than forecasts as recently as November 2019; and
  • The share prices of companies in the sectors most at risk of nationalisation under a Labour government have been the ones to recover most resoundingly, so appraisers using listed company comparables need to review their financial ratio assumptions with great caution.

As one UK investor told BVWire—UK, ‘the UK is no longer “uninvestable”’. For business valuers, this means higher conclusions of value for many small and medium-sized enterprises as well.

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