Market Approach Valuation Resources
Experienced business intermediaries recognize that there are multiple methodologies to value a business and the different approaches available can yield different results. Understanding the purpose for the valuation is the starting point. For example, the value of a business for an IRS audit may be different from the value obtained for a divorce case. The scope, purpose and other factors will determine the type of valuation analysis and calculation undertaken. There are basically 3 business valuation approaches – Income Approach, Asset Approach and Market Approach.
For Business Brokers, the scope is often limited to determining the value of the business for a potential sale and the purpose is limited to calculating the asking price in the current market. This is often referred to as the Broker’s Opinion of Value, aka Most Probable Selling Price. The Market Approach is preferred by many business intermediaries as it derives valuation data through comparisons to similar businesses previously sold.
Main street business sales are generally Asset Sales where the sale price typically includes FF&E (Fixtures, Furniture and Equipment), inventory and Goodwill. Upon receiving the financials, a business intermediary is positioned to recommend a sales price, leveraging the variety of resources available to the professional broker. For Market Approach assessments, these sources provide ratios such as Price/Revenue, Price/SDE, Price to EBITDA; multiples that are often utilized when pricing a business for sale. With the extensive data provided, additional ratios may be analyzed for a more comprehensive analysis but in this article, only the 3 ratios are considered as a general way for determining an indication of value for a business.
Sources of Information available to business brokers:
- Business Reference Guide – This guide which is available online and in print, contains Rules of Thumb for pricing about 700 businesses (searchable via SICS and NAICS Codes). It has been around for more than 20 years. The Rules of Thumb are derived from industry experts such as business brokers, accountants and valuation specialists who have a good feel for what the market is willing to pay for businesses in those industries. Some brokers use this guide to quickly price a business. Others use it as an additional pricing resource, along with pricing obtained using one or more of the Databases described below. The rules indicate a Sale Price as a percentage of annual sales or multiple of SDE and EBITDA.
- BizComps Database – This online database was started in 1990 to provide information on small business transactions. Previously, there was no organized market data for small business sales. Since they were private sales, they were not publicly documented. Today, this database has accumulated over 20,000 transactions. It covers mostly main street business transactions and includes up to 21 data fields per transaction. BizComps sales are all asset sales, which is the norm for main street businesses. This database is often used for smaller deals. It includes both SICS and NAICS codes. BizComps uses the term Price as the actual sale price in $000’s where inventory has been deducted, if it was included in the sale price. The price excludes inventory so that has to be added in. Data can be filtered to consider only Asset Sales.
- Pratt Stats Database – This online database has financial details on about 27,000 private company sales with up to 149 data points. It includes about 900 NAICS codes and 800 SIC codes. This database is typically used for larger deals. Pratt stats uses the term MVIC (Market Value of Invested Capital) for the “Selling Price” and represents the over-all consideration for the business sale. It includes ratios for MVIC/NetSales, MVIC/Discretionary Earnings and MVIC/EBITDA. Data should be filtered for Asset Sales.
- IBA Market Database – This online database has the largest collection of small to medium size businesses with over 37,000 transactions in over 800 industries (SIC/NAICS codes). Over 2,500 are transactions over $1million and over 6,000 are sales from the last 5 years. Includes Price/Revenue, Price/SDE and Price/EBITDA ratios).
- PeerComps Database – Started in 1998, the database now has almost 10,000 transactions submitted by SBA lenders. Approximately 90% are asset sales. Average transaction size is $1 million, which is generally higher than BizComps and lower than Pratt Stats. Inventory is included in the multiples. Ratios shown are Price/Revenue, Price/SDE and Price/EBITDA. NAICS codes are used and a keyword can be used to filter the data.
We are fortunate to have a variety of databases available as sources of market comparables. Access to several databases to consider is advantageous, as the Business Broker can achieve a sufficient sample size to draw pertinent ratios from. Not counting duplicates for sources that may submit the same information to more than one database, there are about 100,000 completed transactions in all the above databases. The disadvantage is the underlying differences, such as source of data and terminology, requiring a Broker to make adjustments to accurately draw comparisons across these different databases. With the appropriate care in the use and analysis of the data when calculating the Most Probable Selling Price, using the Market Approach can be a very useful and powerful valuation methodology.
There are about 30 million small businesses in the United States. Considering the combined total comparable database count is almost 100,000 (not considering double or triple reporting which may occur for contributors to BizComps, IBA and Pratt Stats), we are still a long way from capturing many of the private sales of businesses that occur. Over time, and with continued reporting of small business transaction information, these databases will continue to grow, allowing our industry to have access to larger data sets.