BVWire—UK hopes all of our readers are silently enjoying the GameStop and AMC stock price explosion these last two weeks. It’s an object lesson most business valuation experts take for granted—that a listed company’s stock price is not necessarily a reliable proxy for the business value of closely held enterprises. HMRC and many contested valuations aside, the guideline public company method always requires adjustments and discounts.

Most of the attention in the financial press has been on the ‘manipulation’ of markets caused by a group of Reddit and other website fans. The schadenfreude, if any, has been in watching the loud voices of victimised protest from the wealthiest global hedge funds as they claim that ‘short squeezing’ ignores and destroys market fundamentals. How are we supposed to conduct our wise investment valuation activities if these small market outsiders are allowed to set the price, they complain.

Boo-hoo. Lesson learned, again. Listed company pricing is always, to some degree, manipulated by the flow of large blocks of capital. Leveraged short selling is one of the ultimate tools of market price manipulation, so the complaints of a few hedge fund managers suddenly caught short feel hypocritical.

And, for business valuers, this is nothing new. GameStop wasn’t a valid comparable for private-business value when its market price was artificially depressed. And it’s certainly not a valid proxy now as regulators and Robinhood rush to protect hedge fund managers with leveraged short positions who are already showing -30% returns in this young year.

CBInsights has updated its 2020 summary, showing that 76 private startups achieved unicorn status (a unicorn is a private company that has a valuation of more than $1 billion) last year, including six from the UK:

• Sportswear label Gymshark;

• Food delivery service Gousto;

• Used car marketplace Cazoo;

• Electric vehicle developer Arrival;

• Cybersecurity firm Snyk; and

• Events software provider Hopin.

Other interesting statistics on this rare part of the private capital economy:

• A total of 76 companies achieved the milestone from around the world, with 62% of the new entrants being based in the US.

• COVID-19 apparently slowed down this part of the economy since 122 new unicorns appeared in 2019 and 126 in 2018.

• Fintech is the industry with the largest portion of unicorn value.

• The highest valued unicorn of 2020 is the National Stock Exchange of India (the largest of all time is still China’s ByteDance. CBInsights reports the current value of this tech firm at about £110 billion).

• There are currently (at least at the moment!) 528 unicorn companies globally with a total value of £1.35 trillion.

• The largest UK unicorn comes from the class of 2019: Checkout.com.

CBInsights maintains its current list of the world’s unicorns here.

The Department for Business, Energy and Industrial Strategy's (BEIS) reforms to Companies House filing requirements (first announced in September 2020) continues to move forward.

Since the changes influence compliance for all private companies in the UK, the ICAEW have represented the business valuation profession as a member of the BEIS working group. ICAEW offered input at three public consultations exploring the role and power of Companies House in December. ICAEW have also contributed input from their expert committees and other groups.

The proposed reforms of Companies House requirements include the introduction of mandatory digital filing (with iXBRL tagging), a reduction in the number of filing options available to the smallest companies, and filing deadlines shortened to as little as three months for public companies (the six-month requirement for private companies would remain).

BEIS say that one of their main objectives behind the reforms is to improve the quality and value of the financial information submitted to Companies House. Their current registry is heavily used, but the quality of reporting is mixed, particularly for micro and small organizations.

One of the most complicated reforms suggests that all companies ‘file the most detailed set of accounts prepared for members.’ This would be a huge benefit for business valuation professionals if Companies House could be relied on for more complete disclosure of operational results—but obviously there are costs and disclosure concerns from the business owner community. ICAEW counter those concerns by stating that ‘[i]mproving the quality of information held on the Companies House register could also make it easier for the UK’s smallest companies to access all-important funding.’

BEIS is consulting on whether the powers of Companies House should be extended, allowing it to conduct additional checks on account filings before they are accepted onto the register and giving it greater authority to scrutinise and reject them. Many feel Companies House powers should be increased to reduce perceived fraud and financial crime.

The general deadline for feedback is tomorrow (3 February), though the discussion continues.

ICAEW offer these links to BEIS consultations derived from the previous consultations:

• Corporate transparency and register reform: improving the quality and value of financial information on the UK companies register;

• Corporate transparency and register reform: powers of the registrar; and

• Corporate transparency and register reform: implementing the ban on corporate directors.

Comparability can be a difficult standard when valuing businesses with significant real estate assets used as part of their operating company assets. Some business valuers are concerned that IFRS 16 changes around lease accounting may have made the problem worse.

Another great model—this time for valuation experts with real property-intensive business clients—was released last week from The Footnotes Analyst. The authors are more positive about IFRS 16 than other commentators, even during this calendar year when conversion to the new lease accounting standards remains inconsistent.

‘Similar operating businesses may have very different exposures to the risks and rewards of real-estate investment,’ say the authors in their introduction to their Opco-PropCo analysis. ‘Because real-estate performance and valuation metrics, such as return on capital and valuation multiples, are likely to differ from those for operating businesses, combining the operating business with differing real-estate exposures makes comparing metrics for the combination of operating and real-estate activities very difficult.’

‘Sectors with other “big-ticket” fixed assets, such as airlines or energy companies, where different leasing or ownership strategies are pursued for non-property assets, are also affected,’ they state.

Value nearly doubles depending on real property strategy: A brilliant comparison of four similar operating companies shows that ownership, midterm, and short-term (noncapitalised) lease strategies can increase enterprise value by nearly 80%. Four similar businesses with the same EBITDA plus rental expense (EBITDAR) varied from a low enterprise value of 800 to a high of 1,400. ‘The lower valuation multiples arising from a leasing (and particularly short-term leasing), rather than ownership strategy may lead to the incorrect conclusion’ that companies with owned real property are automatically worth more, The Footnotes Analyst concludes.

They warn business valuers to use caution with the following standard valuation metrics that can be altered because of real property investment strategies within an operating business:

• Return on invested capital (ROIC). Companies that have higher real-estate exposure generally have a lower aggregate return on capital;

• Enterprise value to invested capital (EV/IC). The contribution to enterprise value should reflect the fair value of the real-estate investment; and

• Enterprise value profit multiples. ‘Valuation multiples based on profit measures are also impacted by real-estate strategy. This applies to all of the commonly used multiples such as EBIT, EBITDA and EBITDAR. In each case, a higher level of real-estate exposure is likely to increase the reported multiple,’ they say.

Deloitte’s track record for acquisitions in business services technology and related markets continues to astound. Last week’s announcement that the firm had acquired Root9B LLC (R9B) is one example. R9B is a provider of cyber threat hunting services and solutions. The deal fits into Deloitte’s large ‘Detect and Respond’ cyber client offerings with new technology and more operating staff. Many of these acquisitions increase the range of services (and experts) Deloitte’s business valuation professionals can bring to any engagement.

3 February: Business Valuation Ethics, BVR webinar

11 February: Reliable Valuations for Small and Medium Enterprise: M&A Methods Win, BVR webinar

16 and 18 February: IVSC Financial Instruments Valuation virtual roundtables

17-18 February: ICAEW Advanced Valuation Techniques (repeated 14-15 June), virtual classroom taught live by Steve Shaw

25 February: Forecasting: Removing the Rose-Coloured Glasses, BVR webinar

21 March: EACVA Business Valuation Virtual Conference 2021, online

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