to Value Businesses
January 2024
Transaction databases, such as DealStats and Bizcomps, generally have limited information on business sales as the sales are private. However, they can be valuable in establishing a reasonable value for a business, especially a smaller one, or as a cross-check on value. Valuations of larger businesses can often utilize public data on publicly-traded companies that is more robust.
Transaction databases are limited in that they typically don’t have multiple years of financial data that could be used to estimate future growth rates of revenues, earnings or cash flows. Growth is a major factor in the determination of reasonable market multiples or capitalization rates. However, this limitation can be mitigated somewhat if there is a large number of companies being used as comparables and the use of an average growth rate in the industry appears reasonable based on industry data.
Since transaction databases typically don’t have data on subjective data factors as strength of management, multiples can be skewed lower or higher for companies with low or high strength of management compared to the average.
Since the names of the companies sold are normally not disclosed, there is no way to verify that the data in the databases is accurate. However, there is no reason to believe that the data is biased.
Lastly, a lot of the data in the transaction databases is older than five years and may not be relevant. This, coupled with the fact that the number of transactions in a specific industry code that occurred near a specific valuation date may be very small, limits the usefulness of the data. However, this may be mitigated if it is shown that market multiples in the subject industry are relatively constant over time.
Overall, a transaction database can be useful in valuing a business. However, the valuator must be cognizant of the limitations of these databases as well. Transaction databases are most valuable in valuing small businesses or as a cross-check on the value of larger businesses.
Relevant Court Cases
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Brown Lab Investments, LLC, et al. v.
Lane Moesser,
Court of Appeals for the First District of Texas,
No. 01-21-00668-CV,
Opinion issued December 14, 2023
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In re Sears Hometown and Outlet Stores, Inc.
Stockholder Litigation,
Court of Chancery of Delaware, C.A.
No. 2019-0798-JTL,
decided January 24, 2024
Recent Business Valuation Articles
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“Modeling and Forecasting cash-flows
in Private Investments,”
by Jean-Baptiste Guillemin,
dated August 2023
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“Valuation of Cryptoassets: A Guide for
Investment Professionals (Executive
Summary),”
by Urav Soni and Rhodri Preece,
posted January 3, 2024
Recent Engagements
- Valuation of the non-voting common
stock of a niche food processing
company on a minority interest basis
for gift tax reporting/sale purposes.
- Valuations of class A and class B member
units of a multi-location restaurant
franchisee on a 50% control basis
for sale purposes.
- Valuation of 100% of the
common stock of a specialty retailer
on a controlling interest basis for
potential stock redemption purposes.
- Valuation of 100% of the
member interests of a niche
mineral lease and real estate
holding firm on a controlling
interest basis for estate tax
reporting purposes.
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