Valuation of agrifood SMEs. Lessons to be learnt from the stock market

Raül Vidal,Javier Ribal

doi:10.5424/sjar/2017154-11668

Abstract

The European agrifood industry is mostly characterized by small and medium enterprises (SMEs); as in 2013, SMEs represented 99.13% of the total number of companies. The valuation of SMEs not listed in any stock market is a complex task since there is not enough information on comparable transactions. When applying discounted cash flow (DCF) models to value private agrifood companies, the capital structure and the cost of equity are two key parameters to be determined. The implications of these parameters in the value of the enterprise are not clear inasmuch as it is not possible to carry out a contrast due, precisely, to the lack of comparables. The main goal of this study is to determine the biases that those two parameters can introduce into the valuation process of an agrifood company. We have used the stock market as a framework wherein to apply a simple fundamental model to the companies of the European food industry in order to obtain three valuation multiples. By means of two bootstrap approaches, the bias induced in the multiples has been assessed for every year from 2002-2013. Results show that the use of the return on equity as cost of equity tends to undervaluation; the use of capital asset pricing model (CAPM) tends to a slight overvaluation, whereas using the total beta induces an undervaluation bias. Moreover, the capital structure shows little influence on the valuation multiples. The conclusions drawn from this paper can be useful for managers and shareholders of privately-held agrifood companies.

Highlights

The European agrifood industry is mostly characterized by small and medium enterprises (SMEs); as in 2013, SMEs represented 99.13% of the total number of companies (Eurostat, 2016). Koller et al (2010) stated that the SMEs not listed in any stock market is a complex task. Plenborg & Pimentel (2016) stated that smaller firms are often characterized by a lower information environment when compared with larger firms, which makes the valuation of such firms more challenging.In the case of listed companies, discounted cash flow (DCF) models and multiples are widely adopted (Demirakos et al, 2004; Dukes et al, 2006)
Results show that the use of the return on equity as cost of equity tends to undervaluation; the use of capital asset pricing model (CAPM) tends to a slight overvaluation, whereas using the total beta induces an undervaluation bias
The bootstrap technique is applied to take into account the variability of the valuation process and, the variability induced on the valuation multiples

Summary

Introduction

Koller et al (2010) stated that the SMEs not listed in any stock market is a complex task. In the case of listed companies, discounted cash flow (DCF) models and multiples are widely adopted (Demirakos et al, 2004; Dukes et al, 2006). In a study into mergers and acquisitions in the food industry, Declerk (2016) states that the use of multiples is inevitable. The transparency and high volume of the stock market make it possible to ascertain the valuation multiples. This is only true for listed companies. In the case of privately-held companies, valuation multiples are scarce and barely representative (Ribal et al, 2010). When pricing SMEs practitioners tend to rely on accounting methods, namely net

Objectives

Methods

Results

Conclusion