Are publicly available company valuation multiples relevant?

Owners of businesses are inevitably very interested in the value of their company/ group. The publicly available information on the multiple of profits that businesses are valued at is of two main types:

• Quoted company data involving price-earnings (‘P/E’) ratios (of share price to post-tax earnings) for companies on the Official and AIM stock markets.
• Databases of price multiples (of consideration to profits) on M&A deals completed where the consideration paid by the purchaser is made public (with historic earnings published at Companies House also being used).

The latter are more relevant for privately-owned companies because they overcome the following problems with quoted company statistics:

• Share prices are for recent individual share transactions rather than the purchase of the entire share capital
• Quoted companies are more marketable than privately-owned businesses as the stock markets give a trading mechanism for the shares

However, although private company databases are better they still suffer from serious drawbacks (in the profit multiples they calculate) when they are used to value privately-owned businesses:

• The profit figures used are published historic figures and may not reflect recent (more relevant) profit levels
• Privately-owned company profits may be suppressed by certain expenses which will be non-recurring under a new owner
• Many deals do not have the consideration level published

CLB Coopers, with other independent members of the Leading Edge Alliance, participate in the population of a confidential database which indicates the ‘true’ profit multiples paid in M&A deals. This database uses the profits of companies sold which are the true rather than the published figures which appear in statutory accounts.

What is the relevance of this?
Our analysis of profit multiples on completed M&A deals indicates that the figures in publicly available databases are likely to be around 30% higher than the true figure. Business owners therefore need to be very careful when simply using publicly available information to value companies.

Databases like the one CLB Coopers participate in with other Leading Edge Alliance members are likely to give more meaningful information on the value of companies. Contact us to discuss likely valuations of your business as you consider your strategic options.