Premiums and/or discounts can be applied by the valuer to reflect how the information obtained would likely be applied to the subject business. Most commonly applied include a control premium, discounts for lack of control and/or lack of marketability, and/or a ‘size discount’ (often referred to as a small or private company discount).
A size discount arises when a business valuer is seeking to use data obtained for companies and transactions comparable to the subject entity (usually by industry and/or core service offering), whereby there is a significant disparity in the comparable revenue, profitability, capacity to borrow or a combination thereof.
Size discounts used by accounting expert witnesses and business valuers are often a matter of professional judgement, adding subjectivity to the valuation opinion when users of reports are often seeking a greater level of reliability.
In a recent Victorian Supreme Court judgment, the discount for ‘size’ from asserted comparable listed companies and transactions was debated by accounting expert witnesses.
In the matter of Porter & Anor v Mulcahy & Co Accounting Services Pty Ltd & Ors (No 5), the accounting expert retained by the Plaintiff applied a 50 per cent discount for ‘size’, broadly based on the revenue and profitability of the identified comparable companies and transactions. The Court found that ‘to be required to make an adjustment from a multiple of 10x shown by the evidence to an adopted multiple of 5x shows that the evidence relied on by Mr M is not sufficiently comparable to be of assistance [167]’.
Objective data can be used by business valuers and accounting expert witnesses to assist in supporting ‘professional judgement’, removing an element of the subjectivity and ultimately providing a more robust opinion.
An example of objective data is the ‘Dealtracker’ report published by Grant Thornton Australia which has analysed the Australian mergers and acquisition (M&A) and equity markets since 2012, with the most recent reported released in October 2023.
In the below extract of the Dealtracker 2023 report, the data shows that over the longer term (i.e. Historical Dealtracker average), businesses with revenue greater than $100m have transacted at broadly 10.0x EBITDA, with business with less than $20m in revenue transacting at 6.0x EBITDA, an implied discount of 40 per cent.
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Another source of objective data could be the use of the SME Industry Reports provided by IBISWorld as opposed to the general industry reports. IBISWorld’s SME Industry Reports provide industry data and analysis that focus on operators with less than $10m revenue.
For example, in the Australian Supermarket industry the IBISWorld SME Industry Reports excludes Woolworths, Coles, ALDI, Costco and large independent operators such as Ritchies – focusing on SME’s in the sector. This level of specific industry data is likely to assist the expert in discerning specific factors affecting smaller participants in the sector, which may affect the larger participants in a vastly different manner.
Using objective data may reduce the extent of the subjectivity associated with the ‘professional judgement’ of an expert witness and provide the Court with a level of comfort on the conclusions reached, ultimately assisting in the expert’s opinion being accepted by the Court.
Having said that, there are numerous other factors which an expert witness should (and would) consider in concluding on the appropriate size discount aside from revenue and the industry growth rate – but the use of objective data (where possible) should be taken into account in support of the size discount.
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