The most important point to remember about valuing an international business (defined as one operating largely or completely outside the UK), is that the same tried and trusted methods used to look at one closer to home. And our approach remains the same today as it was at the beginning of 2020 – we always come back to the same core principles. The International Valuation Standards serve as a useful and widely respected reference for applying these principles, but there are some areas that require careful consideration when valuing an international business.
When we value any business, anywhere in the world, we still have to ask the same questions:
To answer these questions, we need financial information. One of the biggest challenges is that we often have limited access to it. Not all countries have a freely, publicly available registry like Companies House. It can be difficult to understand a business, assess its performance, and ascribe a value if the right financial information is not available.
In some cases, differing reporting and audit requirements in different jurisdictions and differing levels of investment in technology may mean that the data developed by the business is less extensive. Limited information can, of course, be true of businesses in all jurisdictions, including the UK, although we benefit from minimum requirements for external reporting and audit. There can also be huge variances in the quality of available information at an industry and country level in developing regions, which can further confound estimates of, for example, market share, economic growth rates, and inflation levels.
Many practitioners use ‘country risk premia’ to reflect variance in perceived levels of investment risk across different countries. This is used within the income approach and adds a premium to increase the discount rate applied to calculate the present value of future cash flows, thereby reducing the value. This is often intended to capture political, economic, and financial risks, including factors such as:
There are several ways of measuring this premium, which can have a significant impact on concluded value and vary hugely between experts. Where the business operates in many different countries, premia can be calculated for each country and applied appropriately to the cash flows.
In the market approach, we identify comparable companies that are either publicly listed or have recently been privately transacted, and for which there is available pricing information. We take the price of the transaction or share price and the business’ financial information and derive a market multiple as a comparable measure of value (most commonly, enterprise value – ‘EV’/ EBITDA).
To find companies that are most comparable, we would naturally look for those operating and selling in the same country. It may be necessary to broaden the geographic search when seeking to identify comparable companies. There are a wide variety of stock exchanges globally and the valuer will need to be comfortable that the identified listed share prices reasonably reflect market values.
The impact of COVID-19 has varied hugely by sector and country, depending on the level and length of ‘lockdowns’ and the pandemic’s impact on business models and supply chains. It's been an extremely difficult time to run or sell a hospitality or events business, and a great time for businesses selling remote working software tools.
Global markets have also been impacted by rising inflation and interest rates, continuing supply chain disruptions and most recently, the war in Ukraine. In general, global equity markets have recovered strongly from pre-pandemic levels, particularly in the US where the S&P 500 and the heavily technology-focused NASDAQ are up around 55% and nearly 80% respectively from their 1 January 2020 position. In the UK, the FTSE100 and All Share indices have recovered to their January 2020 marks according to Financial Times market data, accessed 19 October 2021.
Each country and business must be considered carefully for the impact of COVID-19 and subsequent market events. Particular care should be taken when using market data affected by volatility during period (predominantly Q1 2020) in which market prices were extremely turbulent due to the uncertainty at the beginning of the pandemic.
Finally, we must accurately translate financial information from local currencies to the valuation currency. This can be complicated by several factors.
The performance of the business can be masked by changing forex rates. For example, a business may be deteriorating over time, but the forex rate improving, so that if you look solely at the translated financials, the business appears relatively stable. For this reason, the trends in the business may be best seen in the local current results.
Economic growth and inflation rates can vary hugely by country and must be considered when assessing the forecast cash flows of the business. The (nominal) business forecasts may look exceptional where these are high, but in real terms, once strong economic growth or inflation is stripped out, the project growth may look a lot more modest or even become negative. Care must be taken to assess the likely trajectory of the business in real terms.
Local government policy and availability of foreign currency: in some countries there are two (or more) exchange rates, an 'official' rate and a parallel market rate. This can lead to confusion concerning underlying business performance and the potential for over-valuation of businesses.
So, as ever in business valuation, there are many tricky issues to consider, but rest assured the same fundamental valuation principles apply.
To discuss any of these issues further, get in touch with Fred Brown.
A version of this article was first published in Thought Leaders 4.