Business valuation “tsunami”

November 7, 2017

A headline in the papers this morning read “Who to put your hard-earned on in the Cup”. Brilliant, the day had come for my annual bet / Melbourne Cup cramming session / pretending to know anything about how to read the form guide.

23 horses = 4% chance of winning (all horses are equal).

Easily distracted, I turned to other events of the day. The RBA kept the cash rate on hold citing:

  • Housing market slowdown
  • Low wage growth
  • Sluggish retail results.

As the race started, the ASX broke through 6000 points. Equity markets appear strong, but what about all the private businesses out there.

The Australian Bureau of Statistics tell us there were 2.1 million businesses operating in 2016. Are those business owners losing their hard earned or preparing for the “Exit Tsunami”, as Geoff Green put it.

What is the value of this tsunami?

Honing in on the ABS statistics published in 2017, I made a whole bunch of assumptions to try and answer this question.

Industry Number of businesses Total revenue
($ billion)
Average EBIT margin (%) Business value
($ bn)
Accommodation and Food       90,283 98.7 11.0%           17.9
Administrative Services       82,393 87.0 7.8%           17.0
Agriculture     177,061 101.0 21.0%           53.0
Arts and Recreation       26,390 34.4 12.5%           10.8
Construction     358,449 377.8 11.4%         108.1
Education       28,356 42.3 11.4%           12.1
Health Care     123,401 125.0 17.1%           53.6
Information Media and Telco       20,017 79.9 24.9%           49.7
Manufacturing       83,552 378.4 8.6%           69.7
Other Services       91,575 66.4 3.3%             4.0
Professional Services     262,148 228.1 10.8%           61.8
Public Administration         7,273 10.0 7.0%             1.8
Rental and Real Estate     240,476 157.0 35.0%         198.4
Retail Trade     131,131 409.8 5.5%           35.8
Transport and Warehousing     133,148 159.9 19.1%           95.4
Wholesale Trade       77,922 484.7 4.1%           61.0
TOTAL 1,933,575 2,840 13.1%         849.9

The first three columns are available in various ABS publications during 2017. I have excluded certain industries like mining and financial services where the data was not useful.

The final column is the calculation of business value by industry in aggregate. A high level EBIT multiple was applied to the aggregate industry profit based on the VMB-RMIT Index, a quarterly publication of private business transactions.

I admit the entire table is contrived, but the overall picture should be clear. There are 16 industries presented above, a little less than the Melbourne Cup field.

According to a recent survey, 69% of private business owners are planning to sell or transfer their business over the next 10 years. If my valuation numbers are remotely reasonable, that would mean more than 1.3 million businesses worth more than $0.5 trillion.

The odds of converting this business value into hard-earned cash makes the odds in the Melbourne Cup look inviting.

The tsunami has not yet come and is supported by ABS statistics indicating the exit rate from 2012 to 2016 was only 12%.

By the way, I didn’t back a winner and lost a little of my hard-earned today.

Lachie McColl