“I can no longer stay a silent observer,” says Gary Trugman (Trugman Valuation) about the back-and-forth over how many transactions should be used in the application of the transaction method of appraisal. The April issue of Business Valuation Update contains point-counterpoint articles by Toby Tatum (Alliance Business Appraisal), who says at least 30 transactions should be used, and Ronald D. Rudich (Gorfine Schiller & Gardyn) and Howard A. Lewis (ENVRS and RiskGuidance Co. LLC), who say the minimum should be five transactions.
“Using five transactions makes no sense in most of the databases, but blindly being content with 30 transactions may be almost as bad,” writes Trugman, the author of Understanding Business Valuation: A Practical Guide to Valuing Small- to Medium-Sized Businesses, 5th edition. In a “Letter to the Editor” in the May issue of BVU, he goes on to give his thoughts before concluding that you need to “be careful and use your head.”
This is just one of the points that have triggered some strong reactions. Tatum had conducted a webinar on the use of the BIZCOMPS database of private-company transactions in which he presented “Tatum’s Law of Market Multiples.” Rudich and Lewis have taken issue with a number of other points Tatum presented, including stratifying the data, filtering, the R-square coefficient, harmonic mean, minimum number of transactions, the elimination of outliers, market multiples, and so on.
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