For this week's blog post we're sharing a case study of a quite complex business valuation we conducted in 2020. (You can read all of our case studies in the Resources section of our new website.)
First up, a little background on our client:
- Family-owned specialist construction and building services business, with an annual turnover of approx. $250M
- Business established for more than 30 years and structured as four separate unit trusts.
- The business had seen a succession process in recent years; the new managing director was the majority shareholder of each of the unit trusts
- Three other key employees owned units in different trusts – their ownership corresponding to the divisions in which they worked.
For the business to grow further and have better access to capital, their advisors suggested they needed to corporatise the business, i.e. move it from a trust structure to a holdings company with subsidiaries.
The managing director also wanted to ensure the key senior people in the business had a meaningful share in the entire business, not just the business line (or unit trust) in which they worked.
In order to change to a corporate structure, they needed a business valuation. This valuation was required:
- for statutory purposes, to meet the requirements of the Australian Taxation Office; and
- to determine fair shareholdings in the new structure for those who had an ownership interest, i.e. the managing director and senior team members.
We were engaged to conduct the sworn business valuation and, to do that, we needed to value each of the four business lines and then the overall enterprise value of the group.
That involved working closely with the owner and the heads of each division.
It was quite a complex valuation because it was one business, with four different businesses within, and we needed to consider the different external market drivers impacting the performance of those different sectors.
While there were synergies and connections between some of them, others faced different pressures and drivers within their markets.
Valuation elements we considered included:
- Comparables – we looked at comparable companies in both the public and private markets, in terms of what these businesses were trading on a price-to-earnings ratio and on a market multiple-to-earnings ratio. We looked at comparable companies in Australia plus the US, UK, Europe and parts of Asia, where there were market and/or sector similarities.
- Pipeline – we investigated each of the four businesses’ order books, including work in progress and pipeline of prospects, to assess the strength of their forward business.
- Sustainable earnings – we considered each division’s strengths and weaknesses and portfolio of business and projects. For example, the electrical and maintenance divisions had a smaller relative turnover within the group, but had service agreements and extended tenure on those, whereas the construction-orientated divisions had a mix of small and larger projects across different market sectors.
- External market factors – a key consideration at the time of the valuation was the impact of the first COVID lockdown on each of the different business lines.
The valuation took about three months, during which time we worked closely with the owner, the managers of the four separate business divisions, finance team members and the business’ external accountants.
In the end we delivered a valuation that was used as part of the business restructure.
How we added value
We understood a construction-based business and the nuances of the industry, in terms of sometimes ‘lumpy’ projects and pipelines, and the impact of external market forces on demand for office space and residential building developments.
I think our client valued that, in terms of knowing they weren’t getting a ‘cookie cutter’ valuation – they were getting a valuation that was right for the times, but also right for the specific nature of their business.
As well as experience I think they were looking for some distance and independence, which we delivered. The owners all work together in the company. They needed to feel they got a fair and reasonable deal, and the business was valued objectively and appropriately.
We were able to sit down with the four business owners and clearly explain the reasons behind our valuation of their business, backed up by both our research and our existing knowledge of their industry. We didn’t just provide a number; we were able to provide a rationale and clearly explain it.
We also had some valuable interactions during the process to take onboard feedback from within the business to test and check our findings and opinions. We got the feeling that everyone learned more about their business as a result of the exercise. They learned more about how a third party would look at the business and assess it, and I believe that helped with some of their forward plans around managing the business and building value.
Testimonial: Managing director, Specialist construction business
After a previous meeting with James, in 2020 we engaged JPAbusiness to conduct a business valuation. Independence and transparency were important for the internal purposes of our valuation, which was to reset ownership percentages among existing shareholders.
The JPAbusiness team brought a pleasing level of detail and effort to do justice to our staff, market, management and reporting, contract strength and pipeline of work.
The findings of James and his team were communicated clearly to stakeholders, and stakeholders’ questions were answered and explained with clear justification, aiding the final acceptance of the results.
The JPAbusiness team offers a range of business valuation services. Contact us on 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.