Challenges in ValuationsOf 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

What are the reasons for valuing a family or entrepreneur owned business ?

⑤ Strategy

④ Corporate Governance / Performance assessment

③ Inheritance / Estate planning

② Raising equity or debt financing

① Potential sale

3

Why is the valuation of a family or entrepreneurowned businesses more challenging ?

valuation of a family or

entrepreneur

owned businesses

①Le

ss so

phist

icate

d

repo

rting

syst

ems

and

finan

ce te

ams

②Looser corporate

governance and

structures. More

informal

arrangements

③Rem

uneration of

owners and

managers ca

n be

not very

transp

arent and

requires

additional

clarifi

catio

ns

④Personal

attachment to

the business can

result in a less

professional

approach to

business

valuation

4

What are some of the key challenges in valuing afamily or entrepreneur owned business?

⑤ Psychological Factors

④ Specific accounting adjustments requirements

③ Exit Clauses and Shareholder Agreements

② Corporate Governance Issues

① Size does matter: Applying appropriate Liquidity and Size Discounts

5

① 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

② 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

③ Shareholder Agreements impact on the valuation

In the case of a minority sale, the corporate governance and the shareholder rights impact the valuationImprove the Valuation Decrease the ValuationTag-Along and Drag-Along rights No TA or DA rightsMore Board Seats Less or no board seatsVeto rights on key matters No veto rightsRight 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

④ 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

⑤ 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

  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