Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Fall 2021 Volume 40, Issue 3 pp. 80-96
Mary Ann K. Travers, ASA
Vicentiu Covrig, PhD, CFA
Adam Newman, CPA, ABV
Daniel McConaughy, PhD
Pavan Kumar Nadiminti, MS
option price modeling, valuation methodology, net income, earnings before interest, taxes, depreciation, amortization (EBITDA), earnings before interest, taxes (EBIT), contingent consideration, revenue, earnout


This article presents the first detailed statistical analysis of the volatilities of various commonly encountered financial metrics used in contingent consideration (and earn-out) agreements. The valuation of contingent consideration using an option-based methodology and non-equity volatilities is becoming more common in business valuation. We provide clear evidence that the volatility of five financial metrics—revenue; earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT, net income, and total assets—is strongly, negatively related to firm size and profitability. However, contrary to common belief, the volatility of these metrics is not related to a firm's financial leverage. We also calculated the volatilities using four different methodologies that are employed in practice. Although no theory guides the selection of methodologies, based upon our work, we have found that the year-over-year growth rate, using a quarterly frequency, provides the most reasonable results.
Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations
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