In the world of mergers and acquisitions, determining the value of a business is a multifaceted process, often relying on the multiples approach. This methodology assesses a target company's worth by comparing it to similar entities within its industry, considering various key metrics specific to the Australian market. These metrics include factors such as:
Once a potential buyer has established an initial valuation for the target business, several crucial factors come into play that can affect this valuation. Here are some common factors that can reduce a business's valuation, even after an offer has been made:
One key element for business sellers in Australia to consider is EBITDA add-backs. These are adjustments made to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) to reflect the true economic benefits of owning the business. EBITDA add-backs are essential because they help potential buyers understand the business's profitability better.
Here's a simplified example of how to calculate EBITDA add-backs:
| Category | Amount (AUD) |
| Non-recurring expenses | $60,000 |
| Owner's salary | $100,000 |
| Depreciation | $20,000 |
| Interest expense | $10,000 |
| Total EBITDA Add-backs | $190,000 |
In this example, $190,000 is added back to the EBITDA, representing expenses that are not expected to continue under new ownership. This adjustment provides a more accurate picture of the business's true earnings potential, which can positively impact its valuation.
For Australian businesses navigating the complexities of M&A transactions, understanding these factors and the importance of EBITDA add-backs is crucial. It's essential to proactively address these considerations to maximize shareholder value and ensure a successful sale process. While these are seven common factors, the dynamic nature of M&A transactions means that businesses should remain vigilant for any emerging factors that may impact valuation throughout the sale process.
Changes in inflation (as reported by the Australian Bureau of statistics) or the RBA's central cash rate can significantly impact a business's valuation, even after an initial offer is made. Read more: Implications of Elevated Inflation On M&A If inflation rises for example, it typically leads to higher operating costs for businesses, such as increased raw material prices and wages which can erode profit margins. This could result in a downgrading of the business's valuation, as future earnings are expected to be lower, thus affecting the buyer's willingness to proceed with the same offer. Additionally, higher inflation may reduce consumer spending, further impacting revenue projections. On the other hand, changes in the central cash rate can also influence valuations. A rise in the cash rate often leads to higher borrowing costs, making financing more expensive for buyers and potentially lowering the value they place on the business. If interest rates increase, the present value of future cash flows is reduced, which directly impacts the business's valuation. Conversely, a decrease in interest rates can have the opposite effect, boosting valuations by making financing cheaper and encouraging more investment activity. These factors can prompt both parties to reconsider the terms of the offer, leading to adjustments in the final agreed price.
