Business valuers in the UK often rely primarily on public-company multiples, given the lack of other comparables. BVWire—UK recently surveyed business valuation professionals and confirmed that our readers need better UK-based small and medium enterprise (SME) metrics. The survey found BDO’s PCPI to be the most common tracker for midmarket deals—but not particularly helpful for SMEs and lacking in industry segmentation. The other top sources are the Price Earnings Ratio Database (PERDa), BVR’s DealStats (though there is limited UK data), and BVB Insights. Other sources mentioned by respondents included FactSet, FT Market Data, and Plimsoll. ‘A UK or EU-specific DealStats would be a very useful tool for BV practitioners,’ one respondent commented.

Another said, “I’ve seen valuation reports for local cell phone repair businesses where the only data point is the price earnings ratio for BT.”

In the second edition of his latest book The Dark Side of Valuation, Aswath Damodaran discusses ‘the perils when we extend the pricing lessons we learn from looking at more mature, publicly traded firms to a young, private business.’ This problem is magnified by the frequent lack of multiples or other metrics from comparable smaller private companies.

Damodaran warns: ‘[A]lthough private and public companies can share characteristics, they also differ significantly. Consequently, these differences affect the underlying value of a public company and create an imperfect comparison for valuing a private company.’

Public companies typically:

• Are much bigger than private companies;
• Have had time to sort through growing pains, mature in the market, and stabilize;
• Have diversified streams of revenue and established customers;
• Often have lower growth prospects—which influences their fundamentals and the multiples paid for by investors; and
• Should have a greater chance of surviving than younger companies, and therefore trade at higher market enterprise values.

Particularly within a competitive landscape (in private equity, for example), ‘proper due diligence founded in private market data can protect against overpaying for a deal,’ Damodaran concludes.