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Use the Private Companies Price Index (PCPI) with caution in Business Valuations

The Private Companies Price Index or PCPI is a widely reference index of private company exit multiples published by BDO.   It is useful for establishing trends in the market.   However from what I can see its often used in Business Valuations, call me a cynic but I suspect this may be partly because its widely available and free?  I’ve always said it should be used with caution.   

PCPI-Q2-15So I was interested to read of the recent case of Foulser and Foulser v HMRC, part of a long running serial litigation concerning a failed tax avoidance scheme, and the transfer of two food companies.  The valuation of the companies was in dispute, and two valuers presented different methodologies.  This roundly rejected one valuer’s use of the PCPI as the best indicator of price earnings multiple to be applied saying "There is no transparency of the PCPI. No information is available as to the number of private company acquisitions on which the average P/E ratio is based. Nor is anything known about the companies concerned, including their activity and size. It is thus impossible to take any view on comparability."

The problem in this case wasn’t that the PCPI is of no use, rather that it was a poor measure to focus exclusively on.   When I’m doing a business valuation I’d typically look to use it as additional data to corroborate more specific and transparent data on comparable companies and comparable transactions.

To illustrate why this went to law you only have to look at the taxpayers valuation of £243,750 versus the HMRC valuation of £2.1M.    The tribunal came out at £1.75M in the end.

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