QUICK BUSINESS APPRAISAL - A truly remarkable APP!



ABOUT FME MULTIPLES


Business Valuers - stop looking for the Holy Grail; "The Current Industry FME multiple". It just doesn’t exist!

Why? - because of statistical variance - for example, a recent analysis of the Information Technology industry sector of the ASX showed an average Price-Earnings multiple of around 5, with a standard deviation of 18! This means that 67% of the companies had Price-Earnings ratios varying between minus 13 and 23. So it is obvious that average industry data is really not very useful for business valuation purposes.

Business valuation is really all about understanding the investment risk applying to a specific business in its specific market/industry environment at a specific time!

The QUICK BUSINESS APPRAISAL APP uses a bottom up method of assessing an indicative business valuation from a number of the risk factors that affect the value of a small to medium size business. Caution - It is limited in that it uses only current financial results. We suggest that you use average values over a few years results to obtain a more accurate valuation.

The algorithm used is based on 'artificial intelligence' where the knowledge and judgement of a number of experienced business valuation practitioners is embedded in computer software.

Background - The theoretical CAPM (Capital Asset Pricing Model) formula is shown below - It is useful only for valuing listed shares - and even then it's very problematic: It uses an investment industry concept that investment risk is largely related to the statistical volatility of traded securities. We believe that volatility of return on an investment is just one of very many factors that an intelligent investor has regard for in making a decision to invest in a smaller business. A major concern of such an investor is the probability of a significant reduction or even total loss of his / her investment rather than any period to period volatility in ROI.

CAPM

We use a variation of the CAPM which uses a 'built up' CAPM formula that includes consideration of around 30 identifiable business risk factors to the business cash flow, that we believe is more suitable for establishing the indicative value of small to medium sized, closely held, private businesses:

This software is not intended to bedazzle judges, lawyers and barristers with impressive investment industry mathematical formulae and stock market statistics using things called alpha and beta; rather it is intended to be a hands on tool to enable business owners and accountants to arrive at indicative values for small businesses.

The Built up CAPM formula we use is: Risk rate = risk free rate + base market participation rate + specific market / industry environment risk rate + specific business risk rate

FME Multiple = 1 / Risk rate

Business Enterprise Value = (EBITDA x FME Multiple) - note, EBITDA needs to be adjusted up for unnecessary or non-recurring expense items or even adjusted down in some instances.

And if you are just buying a share in a business - buy a share of the equity, not a share of the Enterprise Value (equity + debt).

However, we recommend that you enlist the aid of an independent professional business appraiser before making any investment or divestment decisions.

More information on business valuation is available at:

www.certifiedvaluers.com


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