How do you know if the multiple used to value a Family business is reasonable?

By de Blonk Smith Young | Shadow Expert | 0 comment | 3 August, 2018 | 3

The short answer is you don’t, unless the Valuation Report provides a defensible determination of the multiple.

The multiple is a reflection of the risk and variability associated with future profits and is a critical factor in most valuations. The higher the multiple the lower the risk and vice versa. The following example illustrates this point.

Adoptinga multiple of 4 instead of 3 results in $500,000 additional business value (33%) and can have a significant impact on the matrimonial property pool and division of assets.

Given the impact that the multiple can have on the business value one would expect the Valuation Report would contain a thorough and detailed analysis of the multiple. However, the opposite tends to be the case. Based on our review of a number of Reports in recent times, any reference to the multiple has typically been confined to a couple of short paragraphs.

The typical justification given for the lack of information is “the determination of the multiple is not an exact science and is highly subjective”. Furthermore, the valuer sometimes states that there is no formula or mathematical approach to determine an exact figure. In the absence of any detailed analysis or calculation we are asked to rely upon “the valuer’s experience”, albeit highly subjective, in the determination of an appropriate multiple.

Factors to be considered in the Valuation Report in the support of the multiple should include (but are not limited to) the following:

nature and size of the business
prospects of the industry
strengths, weaknesses, opportunities and threats
critical success factors and key risk areas
key relationships (customer, supplier and staff)
revenue mix (customer and product)
level of debt
historical trading results
strength of the balance sheet (asset backing)

Unfortunately, the subjective nature associated with the multiple can never be completely eliminated, and in reality, there is usually a range of multiples. While most Valuation Reports do not quote a range of multiples or business values, it is useful to keep this in mind when negotiating a property settlement.

If you need help to interpret an Expert’s Report, or any assistance with the property pool (including the taxation issues) please feel free to contact John or David on 3221 4465 or email john@dbsy.com.au or david@dbsy.com.au on an anonymous and no obligation basis.