Business Valuations: Benchmarking and Trending of Financial Data

I want to talk about benchmarking and trending of financial data in the context of a business valuation.  Reviewing other experts reports, I believe there is some confusion among business valuation experts as to what benchmarking and trend analysis is.

Benchmarking Using Risk Management Associates

It is my experience that in the business valuation world, Risk Management Associates (“RMA”) benchmarking data reports are the leading reports utilized by business valuators.  The RMA data helps the business valuation professional make informed decisions about a company’s financial performance compared to the industry and evaluate the client’s strengths and weaknesses more accurately.

The benchmarking analysis is best performed by comparing each year of a company’s performance to the RMA annual data.

It has been a staple in credit decision-making for more than 100 years.

Benchmarking with No Trending

It is imperative that a trending analysis be performed.  Utilizing data from an actual report, it can be seen that the business valuation professional used six years of company data but only one year of RMA data.  Note that the RMA data does not have a date for the year of the industry.  It is impossible to gain an understanding of how the company has performed over the years of analysis.  The table does not display the RMA data for each year of the analysis in order to compare the subject company with the historical industry financial performance.

Benchmark with No Trending

Benchmarking with Trending

Benchmarking with annual historical data compared to the actual historical RMA data provides the business valuation professional with the comparison to the industry which allows for an understanding of how a company has performed over the years of analysis.

Benchmark with Trending

Conclusion

The trending is vital to understanding how the company has performed in comparison to the industry.  The benchmarking data should be performed for all of the ratios where benchmarking data has been provided.  This analysis is often used to assist in developing the company specific risk.  Without the trending data, it is impossible to understand how the company has performed in comparison to the industry in which it operates.

Richard Claywell has been valuing closely held companies since 1985.  Richard is a Certified Public Accountant and has a Master’s in Business Valuation.  He has also earned two of the highest designations in the business valuation field including the CBA and ASA, and holds the ASA, CBA, ABV, ICVS, CVA, MAFF, CFD, CVGA, ICVS-A credentials.

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