ValuSource Introduces: The Richest and Most Comprehensive Comparables on the Web: IBA Data, 24/7
The Richest and Most Comprehensive Comparables: IBA Data, 24/7. Log On Today.
Business valuation has often been called an art, not a science. Revenue multiples are one key method; another is the use of comparables. Many valuators use both. KeyValueData offers NACVA members access to the IBA comparables, which are the richest and most comprehensive set of comparable available in the valuation world. Hereâs an overview of the why comparables helpâand what youâll find in the IBA data set.
âThe measure of value in a business is the multiple of earningsâfor public companies it is the price/earnings ratio (P/E), for middle market companies it is the multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) and for smaller companies it is the multiple of discretionary earnings.ââNey Grant, AllBusiness.com
or put alternately:
Â âThe value of small business is mostly determined by the cash flow (or business brokers use the term âSellerâs Discretionary Earningsâ instead to be more accurate). Those who follow this thinking typically use commercial comparables databases that provide a Sellerâs Discretionary Earnings (SDE) data field for companies that have been sold.â âRon Hottes, BizBen.com
However, a growing group of business appraisers and authors are challenging the SDE approach and promoting the value of the Comparable Sales Method, or the Direct Market Data Method, as it is called by the Institute of Business Appraisers.Â
As Julian Roche noted in The Value of Nothing: Mastering Business Valuations (2005 Lessons Financial Pub.):
âThe direct data method has four primary advantages over other methods of valuing middle-size and smaller businesses.Â First, because it uses information taken directly from the market for private businesses, it eliminates the necessity for the appraiser to make subjective judgments required when using guidelines.âŚFinally, it makes much more sense to the outside world.âÂ
In agreement are Scott Gabehart and Richard Brinkley, who write inÂ The Business Valuation Book: Proven Strategies for Measuring a Companyâs ValueÂ (2002 AMACOM),
âFor the typical small business with an active owner-operator and an ACF [ed: Adjusted Cash Flow] of $1 million or less the comparable sales method probably is most relevant.âÂ
Thomas West and Jeffrey Jones in theirÂ Handbook of Business ValuationÂ (2009 Wiley) write that:
âFor years, this approach [Direct Market Data Method] has been discounted, due to the difficulty of obtaining reliable information; however the computer and twenty-first-century technology has provided instant access to unlimited sources.âÂ
The Institute of Business Appraisers (IBA) have collected and reported on data for use with the Comparable Sales Method/Direct Market Data Method for over a decade. Transaction data comes from individual business brokers, accountants, and other intermediaries involved in the actual sale/purchase of closely held businesses, and from organizations of such persons.Â
Data in the IBA Market Data database includes:Â
- SIC Code numberÂ
- Business typeÂ
- Annual gross salesÂ
- Owner’s compensation expenseâThis data category is not available for all transactionsÂ
- Annual earnings before owner’s compensation expense, interest expense, and income tax expense. This data category is not available for all transactions and is of only marginal utility given the quality of small business financial statements.Â
- Year and month of sale (There are a few instances in which this data category is not available.)
- Sales price, which is defined as total consideration, including cash, notes, liabilities assumed by buyer, and other consideration such as employment contracts or non-compete agreements (Sales price is reported excluding any real estate).Â
- Geographic information: city and stateâThere are some instances in which confidentiality considerations require omission of this information.Â
- Ratio of sales price to gross salesÂ
- Ratio of sales price to annual earningsâThis ratio is not calculated for those transactions for annual earnings information is not available.Â
For finding industry transaction data, the IBA Market Data database is hard to beat:
- Number of transactions in the database: 33,777Â
- Number of transactions in the database in the following size ranges: $0-$500,000 in annual sales: 23,978 (70.99%); $500,001 – $1,000,000 in annual sales: 4,823 (14.28%); $1,000,001-$5,000,000 in annual sales: 3,556 (10.53%); $5,000,001-$10,000,000 in annual sales: 381 (1.13%); Greater than $10,000,000 in annual sales: 245 (.73%).Â
- SIC categories in which there are:
At least one transaction: 785Â
At least two transactions: 603Â
At least five transactions: 425Â
At least 10 transactions: 305Â
At least 20 transactions: 197Â
At least 50 transactions: 109Â
At least 100 transactions: 58Â
The IBA, in conjunction with ValuSource and the National Association of Certified Valuators and Â Analysts (NACVA), is constantly working to improve the quality and quantity of data collected on small business transactions.
When your subject company is managed by the owner, be sure the comparable Sales Method/Direct Market Data Method is part of your valuation, and that IBA Market Data is informing your calculations.
ValuSource and KeyValueData have arranged to provide access to the IBA Market Data database via the web, without the requirement of IBA membership. With your subscription to ValuSourceâs IBA Market Data, you also receive the IBA Market Data Analyzer, an Excel template that imports your selected data and analyzes that data. With this information, the appraiser can objectively place the subject business in the market.Â
To learn more, or for a personal tour of IBA Market Data, call ValuSource at (800) 825-8763.