IACVA family Business Valuations Presenation
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1) Valuing family-owned businesses can be more challenging than other businesses due to psychological factors like owners being attached to the business and expecting high valuations. It also involves accounting for owner/manager salaries and related party transactions. 2) Key challenges in valuing family businesses include applying appropriate liquidity and size discounts due to their smaller size, addressing corporate governance issues, and considering how shareholder agreements and exit clauses impact minority share valuations. 3) Valuators must make company-specific accounting adjustments to determine a "steady state" valuation, remove owner/manager salaries and benefits, add back potential replacement costs, and potentially apply conglomerate discounts if the business is diversified.
IACVA family Business Valuations Presenation
- 1. Challenges in Valuations Of Regional Family-Owned Businesses Awad Capital Ltd. is authorized and regulated by the Dubai Financial Services Authority (DFSA) By: Ziad Awad IACVA Dubai Business Valuation Conference 13 December 2015
- 2. 2 What are the reasons for valuing a family or entrepreneur owned business ? Strategy Corporate Governance / Performance assessment Inheritance / Estate planning Raising equity or debt financing Potential sale
- 3. 3 Why is the valuation of a family or entrepreneur owned businesses more challenging ? valuation of a family or entrepreneur owned businesses
- 4. 4 What are some of the key challenges in valuing a family or entrepreneur owned business? Psychological Factors Specific accounting adjustments requirements Exit Clauses and Shareholder Agreements Corporate Governance Issues Size does matter: Applying appropriate Liquidity and Size Discounts
- 5. 5 The size issue Smaller companies attract lower valuations than larger companies in the similar sector and geography Two types of discounts need to be applied when attempting to use the multiples of larger listed companies or M&A transactions for the valuation of a smaller company: A small company discount to reflect the reduced attractiveness of smaller businesses to buyers A liquidity discount, particularly when comparing a privately owned company to a publicly listed one When valuing 100% of the equity of a company based on the prices of the shares of listed companies, a control premium can be added to reflect the fact that each shares represent a small minority interest
- 6. 6 Corporate Governance Good corporate governance is good for business, and this includes the value of the business Some key corporate governance factors that enhance valuation: Independent directors Separation of Chairman and CEO Good mix of family / non family and executive / non executive members of the board Clear organisational charts and authority matrices Well established (written) processes and procedures
- 7. 7 Shareholder Agreements impact on the valuation In the case of a minority sale, the corporate governance and the shareholder rights impact the valuation Improve the Valuation Decrease the Valuation Tag-Along and Drag-Along rights No TA or DA rights More Board Seats Less or no board seats Veto rights on key matters No veto rights Right to trigger an IPO or strategic sale No clear path to exit Right to appoint certain members of management No rights to appoint or remove management The more rights and flexibility a minority investor has, the higher the valuation they will put on the company
- 8. 8 Company specific accounting adjustments Adjustments need to be made for owner/managers who will exit the business: Remove salaries and all benefits from the P&L Add back the costs of potential new hires needed to replace them Family-related employment and related parties transactions need to be identified and adjustments made to achieve a Steady state valuation If valuing a conglomerate, additional challenges arise that lead to potential discounts to the valuation: If the conglomerate is diversified, it is difficult to find comparable companies and a sum of the parts approach may be more appropriate A conglomerate discount may then be required
- 9. 9 Psychological factors Human nature means we are attached to our properties, particularly if they have been passed down the generations In the case of business valuations, this leads to typically very high valuation expectations on the side of owners The perception that the family business is unique makes comparing to comparable companies or transactions difficult to explain Applying size and illiquidity discounts is even more difficult to accept
- 10. Awad Capital Ltd.(ACL) is authorized and regulated by the Dubai Financial Services Authority (DFSA). This document is a marketing presentation and does not constitute investment or other advice. These materials may not be disclosed, in whole or in part, or summarized or otherwise referred to except as agreed in writing by ACL. This material is intended for Professional Clients only and no other person should act upon it. For further information about Awad Capital and how we can help you achieve your strategic financial objectives, please contact one of our principals or visit our website on www.awadcapital.com Ziad Awad Chief Executive Officer Phone: +971 (0) 43 25 46 62 Mobile: +971 (0) 504 58 55 06 Ziad@awadcapital.com 10 Dr. Marc Nassim Managing Director & Head of Corporate Development Phone: +971 (0) 43 25 46 62 Mobile: +971 (0) 557 11 69 40 Marc@awadcapital.com Important Information and Contact Details