This week, I am discussing the selection of market multiples from various databases and the process of eliminating transactions that are not comparable. I will not be discussing all of the reasons to eliminate transactions for not being comparable but will give you an idea of what the process is like.
Types of Databases
There are two types of databases, one for public company pricing multiples and four for sales transactions for closely held companies. All of the databases should consist of an unrestricted search for the North American Industry Classification System (“NAICS”) or Standard Industrial Classification (“SIC”) code of the specific company. All of the transactions should be transactions on or before the business valuation date. Data that is not known or knowable as of the valuation date should not be used. The process of selecting and eliminating transactions should be included in the business valuation report.
Eliminating Market Transactions
Not all of the transactions are comparable to the specific company being valued. Some, but not all of the following are valid reasons to eliminate the market transactions from further analysis: (1) transactions occurring after the valuation date, (2) transactions with no revenues, (3) transactions with no earnings or losses, (4) transactions too large or too small, (5) duplicate transactions, (6) transactions not in the same line of business, (7) companies in a foreign country, (8) outlier transactions exceeding 2.5 standard deviation of the data being considered, (9) data not symmetrical.
Summary of Why to Eliminate Transactions
Not eliminating the transactions discussed above will introduce damaging information that make the data results flawed and not represent reliable application of the principles and methods generally used in the field of business valuations.
Richard Claywell has been valuing closely held companies since 1985. He has earned two of the highest designations in the business valuation field, the Certified Business (“CBA”) Appraiser and the Accredited Senior Appraiser (“ASA”). Richard is a Certified Public Accountant, has a Masters in Business Valuation and holds the ASA, CBA, ABV, ICVS, CVA, MAFF, CFD, CVGA, ICVS-A credentials.
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