Market Data for Pricing a Business: It May Not All Be What it Seems SHAWN HYDE, CBA, CVA, CMEA, BCA EXECUTIVE DIRECTOR INTERNATIONAL SOCIETY OF BUSINESS APPRAISERS
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Market Data for Pricing a Business:
It May Not All Be What it Seems
SHAWN HYDE, CBA, CVA, CMEA, BCA
EXECUTIVE DIRECTOR
INTERNATIONAL SOCIETY OF BUSINESS APPRAISERS
About Shawn Hyde▪ I’ve been appraising businesses for
over 20 years
▪ I started out in business brokerage,
but moved into the business appraisal
field full time about six years later
▪ I’ve written and taught various
courses on business appraisal
▪ I was heavily involved in the Institute
of Business Appraisers for a number of
years, now I am the Executive
Director of the International Society of
Business Appraisers
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Market Data May Not All Be What it Seems…
Let’s explore transaction data from the various databases available to the business
broker and,
Describe potential pitfalls in each.
We will look at the different multiples available and describe ways of reconciling them
into a potential listing price.
We will also discuss why business appraisers should not only rely on the market approach
in a business appraisal.
We will also look at some real-life applications of the market approach and talk about
the ways in which they could have been applied more accurately.
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What is the Market Approach?
From the International Glossary of Business Valuation terms
Market (Market-Based) Approach—a general way of determining a value
indication of a business, business ownership interest, security, or intangible asset
by using one or more methods that compare the subject to similar businesses,
business ownership interests, securities, or intangible assets that have been sold.
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What is the Market Approach? – Con’t
There are several sources of market data available to us now
Below are listed the most commonly used, in no particular order
Deal Stats
ValuSource
PeerComps
BizComps
What other sources are available? Let’s list a few before we move to the next slide:
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What is the Market Approach? – Con’t
Some other sources of market data are:
Publicly traded companies
Proprietary databases from individual business brokerages
Prior transactions in a company’s stock
Rules of thumb
Did we mention all of these?
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What is the Market Approach? – Con’t
Ideally, the best indications of value should come from the market
The ‘market’ is where one can analyze the transaction prices of similar
investments in order to estimate what another investor might pay for a
similar business
Unfortunately, there are some problems we need to be aware of…
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Problems with the Market Approach
None of the transactions included in any market database was actually
concluded at fair market value
This often comes as a surprise to some people
Consider the definition of Fair Market Value on the next slide
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Definition of Fair Market Value
From the International Glossary of Business Valuation terms
Fair Market Value—the price, expressed in terms of cash equivalents, at which
property would change hands between a hypothetical willing and able buyer
and a hypothetical willing and able seller, acting at arms length in an open
and unrestricted market, when neither is under compulsion to buy or sell and
when both have reasonable knowledge of the relevant facts. {NOTE: In
Canada, the term “price” should be replaced with the term “highest price”.}
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Problems with the Market Approach
Every business is different
“If you’ve sold one restaurant, you’ve sold any other restaurant.”
Anybody ever heard that line?
Is there a difference between a hamburger joint and a full-service dinner place?
How about a sub sandwich shop and an ice cream store?
All of these can be found under the NAICS code for restaurants
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Problems with the Market Approach
Some brokers sell the real property associated with a business as well as
the business, and do NOT separate the two portions on the data
submission form
That leads to higher multiples for certain transactions used as market comps
Just because one business sold for 1.5 times gross revenue, doesn’t mean
another should be priced that high, especially since we don’t know details
about the occupied real estate.
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Problems with the Market Approach –
Con’t
Not every broker calculates SDE the same way as all the other brokers
A lot of the submitted data doesn’t even include an SDE calculation
Do all of you make the same normalization adjustments?
Do any of you adjust officer’s compensation’s associated payroll taxes?
Do you break out the owned real property by including a market rent
expense?
Do you add back ‘unrecognized earnings’?
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Problems with the Market Approach –
Con’t
Those of us who use the data, know comparatively little about each business transaction
Was that retail shop located in an above average location for walk-in traffic?
Maybe it was located in a hard to get to area, but was successful due to its specialized inventory?
Did the restaurant have a successful side business offering catering services?
Was the auto repair business focused only on German cars, or did they work on any light vehicle?
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Problems with the Market Approach –
Con’t
Some businesses operate in more than one NAICS code
My favorite was the business that offered website development services, screen
printing, custom embroidery, and marketing consulting
Any of you have any favorite examples of businesses crossing over NAICS lines?
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Problems with the Market Approach –
Con’t
Some transactions occurred well over ten years ago
Has the industry changed significantly in the last ten years?
If not, are the older transactions still useful?
If it has, are the older transactions still useful?
Example - Video rental businesses, Blockbuster
Example - Printing businesses
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Problems with the Market Approach –
Con’t
Some transactions occurred well over ten years ago
For example, in just the Deal Stats data we will be analyzing shortly, one of the transactions occurred on February 28, 1996
BizComps had a transaction that sold on January 1, 2006
PeerComps only tracks the year, and the oldest one in our data we will be analyzing happened in 1999
The oldest one in our ValueSource data happened on January 26, 2010
Are any of these too old to use? Why?
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Problems with the Market Approach –
Con’t
Transactions may occur across a wide variety of geographic areas
The Deal Stats data we will use later on includes transactions in 35 different states
The BizComps data has sales that occurred in 104 different areas.
Peer Comps has 38 different states tracked
ValueSource has 43 different states
Does a fast food hamburger restaurant function any differently in Texas than it does in Florida? How about Kentucky?
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Problems with the Market Approach –
Con’t
Some businesses are sold as stock deals instead of asset sales
Have any of you seen/worked on/participated in/sold a business as a stock
deal?
What are the differences between a stock sale and an asset sale?
Could any of these differences affect a transaction multiple?
Are there any other problems we may have missed?
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Common Questions on the Market Approach
Does the age of the individual transaction matter?
Do the multiples vary over geographic regions?
Why do the various multiples all derive different value conclusions?
How can one use transaction data of asset sales to value stock?
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Deal Stats – Basic Theory
Transactions include both private and publicly traded companies
There are transactions where a publicly traded company purchased a privately held business.
Are those multiples useful for our purposes?
Sometimes
There are transactions that are Asset sales mixed in with Stock sales
What is included in a Stock sale, that is not included in an Asset sale?
Unknown things
Some transactions include the value of the real property
It is assumed that each transaction included a normal operating level of inventory
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BizComps – Basic Theory
There are fewer details on each transaction than in Deal Stats
There are likely transactions that are Asset sales mixed in with Stock sales,
but it is impossible to pick them out
Some transactions likely include the value of the real property
Inventory is completely removed from the equation
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PeerComps – Basic Theory
Has the fewest details available on each transaction
We don’t know if there are transactions that are Asset sales mixed in with
Stock sales
Some transactions likely include the value of the real property
It is assumed that each transaction included a normal operating level of
inventory
Each transaction came from a banker, not a broker
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ValueSource – Basic Theory
There are fewer details on each transaction than in Deal Stats
There are transactions that are Asset sales mixed in with Stock sales
What is included in a Stock sale, that is not included in an Asset sale?
Unknown things
Some transactions likely include the value of the real property
It is assumed that each transaction included a normal operating level of
inventory
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Selecting the Multiple for Use
Commonly cited transaction multiples
Sales price to Gross revenues
Sales price to Seller’s discretionary earnings
Sales price to EBITDA
Others?
Generally, the analyst calculates the average or median multiple
Are you always going to be putting a price tag on an average or median business?
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Selecting the Multiple for Use – Con’t
How does one tell if one is listing an average or median business?
Is the business more or less profitable than another similar business?
Is the customer base more or less diversified?
Are the contracts with suppliers more or less advantageous for the owner?
Are they transferable?
Is the inventory turning faster or slower than other similar businesses?
Are their prices too low, or perhaps too high?
Are their revenues being collected, or are their receivables out of control?
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Selecting the Multiple for Use – Con’t
One method is by comparing the subject business operations with its industry averages through a comparative financial ratio analysis.
Sources of industry financial data
BizMiner
RMA
Integra
Profit Cents
Industry trade journals
Others?
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Selecting the Multiple for Use – Con’t
The idea behind this type of analysis is that businesses that perform better than their
industry average, are likely worth more than those businesses that under perform as
compared to their industry.
Almost all business owners believe their business is worth more than it really is
This is one way to show reasons why buyers are offering less than the asking price, or
why the suggested listing price may be lower than the Seller wants.
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Selecting the Multiple for Use – Con’t
Analysts who can show reasons for their selected multiples, provide a better service to
their clients, and can lead into consulting projects to help improve a business’ value.
How does one adjust a multiple up or down based on the ratio analysis?
Great question! Let’s talk about that.
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Real Life Examples of the Market Approach
The next few slides show excerpts from actual reports I have reviewed
showing various applications of methods under the market approach
I have edited them slightly to protect the names of the innocent and the
guilty alike.
But, let’s come back to these AFTER we play with the sample analysis I
brought.
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How was the
multiple
selected?
What kind of analysis do you
think the appraiser completed of
the underlying data, before
selecting that multiple?
Carpet Cleaning and Maintenance
Price/Net Revenues Market Multiple Method
As of December 31, 2013
Note
#
Net revenues 1,385,935$ 1
Selected price/net revenues multiplier 0.70 2
Indicated value - invested capital 970,154
Adjustments for assets and liabilities not included in typical sale:
Add: cash 65,254 3
Add: accounts receivable 130,487 3
Less: total liabilities (200,243) 3
Net adjustments for assets and liabilities not included in typical sale (4,502)
Indicated equity value per the price/net revenues market multiple method - rounded 966,000$
Notes:
(1) Historical Income Statement Exhibit A - 1 . Multiple off sales revenues was used to
determine the revenue stream per Pratts Stat Data base
(2) Multiple of Net revenues as per Pratt Stats Data Base in the SIC code of 7217-04
and the NAICS code of 56174
(3) Adjusted asset and Liabilities from the Adjusted Net Asset method Exhibit C - 1
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This one shows the
data analyzed
and includes
some analysisThese companies are generally similar to the
subject in terms of revenues. However, there
are three companies with lower revenues than
the subject and one considered as an outlier.
The following is a quote from the report:
“This preceding table shows a range of Gross
Sales of $1,100,000 to $1,794,000, with a mean
average of $1,327,500 and indicates a
coefficient of variation of 40%.”
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And Here is the Method Applied
Does the selected multiple look familiar?
Why is the appraiser adding back the inventory here?
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Some More Data That was Analyzed…?
How wide is the range of multiples listed?
The next slide shows the appraiser’s application of the method.
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Application of the Selected Multiple
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The Public Company Guideline Method
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Questions?
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CONTACT US
INTERNATIONAL SOCIETY
OF BUSINESS APPRAISERS
1005 SLATER ROAD
SUITE 101
DURHAM, NC 27703
SHAWN HYDEPHONE: +1 469-412-9935
www.intlbca.com
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