Dimension SA’s view of the Swiss corporate transaction market post Covid
What impact does COVID have on company valuations? What does the ‘theory’ say?
There are two main methods of business valuation:
- The first considers that the ‘economic value’ of a company is the discounted sum of the future cash flows generated by that company. Discount rates are currently around 8% to 10% for listed companies and within a broad range of 12% to 15% for privately-owned SMEs. This rate reflects the anticipated risk and return on equity expected by the investor.
- The second is that the ‘market value’ of a company depends on its operating profit and a price multiple observed on the market. According to recent studies, this is around 5.0 to 6.0 times EBITDA (earnings before interest, tax, depreciation and amortisation) for companies with sales of between CHF 1 and 20 million (average for all sectors combined), and as much as 8.0 to 10.0 times EBITDA for companies with sales of more than CHF 20 million.
Whatever method is used, the value of an SME is strongly linked to its size and sector of activity. In valuation practice, it is sometimes necessary to deviate significantly from the “norms” indicated above by also considering the following points:
- The greater the dependence on the selling shareholder (often a manager in SMEs), the lower the value.
- For the sector, resilience to the health crisis, favourable growth prospects and strong profitability will be factors supporting valuations.
Based on these theories of financial valuation and the assumption that investors’ expectations of profitability have remained unchanged, the value of many SMEs is likely to fall. In the current market situation, the results of many SMEs are below expectations. In addition, some have increased their debt and/or postponed investments, which should also result in a fall in shareholder value.
What are the financial markets saying?
In practice, things are rarely that simple and financial theory is often contradicted. The recent transactions of which we are aware were often completed at the price initially envisaged, without renegotiation. The impact of COVID on the financial statements of the acquired company is therefore not systematically reflected in the valuation that justifies the price paid.
We attribute the reasons for our finding to several factors:
- All investors are subject to the same market situation.
- There is still a significant amount of cash to invest, risk-free interest rates are negative and the search for yield continues.
The state of the market makes it necessary to accept a lower return for the investor. In our experience, this is particularly true when several buyers are interested in the same SME. Investors are becoming more selective and demanding when it comes to the quantitative and qualitative criteria of their investments.
The allocation choices made by financial investors include the following:
- Private equity investment in unlisted companies is growing in popularity. In Switzerland, more than a third of SME acquisitions are made by investment funds.
- Certain industries, such as healthcare for its growth prospects and real estate for its relative consistency, are in demand. ESG (environmental, social and governance) standards are gaining in popularity. Companies that have already been awarded the label are attractive.
- Successful, stable and well-managed SMEs are coveted by strategic and financial buyers.
What conclusions can be drawn?
Our current observation, based on our activities in Switzerland, is that investors are becoming more selective and are prepared to forego certain transactions. On the other hand, the prices paid for successful SMEs remain high.
Competition as part of a structured and professional sales process will be all the more important in the current climate to ensure that the seller obtains the best terms.
What role can Dimension play in this?
Dimension SA, a long-standing player in corporate transaction advisory services in French-speaking Switzerland, acts as a professional advisor to owners of Swiss-based companies.
Our business is to support corporate transactions in order to identify the best counterparties, enhance the value of the company and ensure a smooth and professional execution of the process, with the aim of achieving an optimised transaction under the best market conditions.
We can assist you in your sale or acquisition process or provide you with our expertise on the value of the company concerned.
We would be happy to meet with you to discuss the issues involved in a potential transaction.
Dimension SA
Dimension SA, founded in 1994, is a company active in the transfer and valuation of businesses throughout Switzerland. As an experienced, reliable and pragmatic partner, Dimension SA is the business owner’s preferred partner for analysing valuation potential and carrying out business transfer transactions. Dimension SA enhances the value of the business, refines the negotiation strategy and prepares the market, in order to optimise results for its clients. It has been part of BCGE Group since 2015.