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. Here‚Äôs an overview of the why comparables help‚ÄĒand what you‚Äôll find in the IBA data set.
‚ÄúThe measure of value in a business is the multiple of earnings‚ÄĒfor 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.‚ÄĚ‚ÄďNey Grant, AllBusiness.com
or put alternately:
¬†‚ÄúThe value of small business is mostly determined by the cash flow (or business brokers use the term ‚ÄėSeller‚Äôs Discretionary Earnings‚Äô instead to be more accurate). Those who follow this thinking typically use commercial comparables databases that provide a Seller‚Äôs Discretionary Earnings (SDE) data field for companies that have been sold.‚ÄĚ ‚ÄďRon 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.¬†
As Julian Roche noted in The Value of Nothing: Mastering Business Valuations (2005 Lessons Financial Pub.):
‚ÄúThe direct data method has four primary advantages over other methods of valuing middle-size and smaller businesses.¬†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.‚Ä¶Finally, it makes much more sense to the outside world.‚ÄĚ¬†
In agreement are Scott Gabehart and Richard Brinkley, who write in¬†The Business Valuation Book: Proven Strategies for Measuring a Company‚Äôs Value¬†(2002 AMACOM),
‚ÄúFor 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.‚ÄĚ¬†
Thomas West and Jeffrey Jones in their¬†Handbook of Business Valuation¬†(2009 Wiley) write that:
‚ÄúFor 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.‚ÄĚ¬†
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.¬†
Data in the IBA Market Data database includes:¬†
- SIC Code number¬†
- Business type¬†
- Annual gross sales¬†
- Owner’s compensation expense‚ÄĒThis data category is not available for all transactions¬†
- 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.¬†
- 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).¬†
- Geographic information: city and state‚ÄĒThere are some instances in which confidentiality considerations require omission of this information.¬†
- Ratio of sales price to gross sales¬†
- Ratio of sales price to annual earnings‚ÄĒThis ratio is not calculated for those transactions for annual earnings information is not available.¬†
For finding industry transaction data, the IBA Market Data database is hard to beat:
- Number of transactions in the database: 33,777¬†
- 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%).¬†
- SIC categories in which there are:
At least one transaction: 785¬†
At least two transactions: 603¬†
At least five transactions: 425¬†
At least 10 transactions: 305¬†
At least 20 transactions: 197¬†
At least 50 transactions: 109¬†
At least 100 transactions: 58¬†
The IBA, in conjunction with ValuSource and the National Association of Certified Valuators and ¬†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 ValuSource‚Äôs 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.¬†
To learn more, or for a personal tour of IBA Market Data, call ValuSource at (800) 825-8763.