For the past fifteen years, the users of Pratt’s Stats® and other private databases (such as BIZCOMPS®, etc.) have provided an informal peer review of applying the transactions data in the market approach. At the AICPA’S National BV Conference in San Francisco two weeks ago, Jim Hitchner (Financial Valuation Advisors) added to the peer-acceptance process, first by pointing out that all BV professional standards, including the AICPA’s SSVS-1, require the appraiser to investigate guideline transactions data and make any necessary adjustments to minimize the differences in accounting treatments between the subject company and the comparables.
Hitch then examined nine copyrighted transactions and footnotes from Pratt’s Stats to illustrate typical adjustments and highlight potential red flags to varying deal structures, such as:
- Does the purchase price include working capital (excepting inventory)? This could influence MVIC multiples when averaged with transactions that treat this asset differently.
- Does it include other assets and/or liabilities? Purchase price allocation information available in Pratt’s Stats can help highlight non-standard transactions (those that include more than cash paid, notes, or interest-bearing liabilities).
- Were contingent earn-outs included? Contingent payments are normally excluded from MVIC, requiring adjustments to transactions that include these elements.
- Is the income statement concurrent with closing? Many of the proprietary deal documents collected by Pratt’s Stats analysts include statements generated as part of the offering memo or last period available, and the resulting multiples should adjust for any material changes.
- Does the purchase price allocation apply value to the non-compete, if any? Since CPAs are often lax in this accounting practice for small business transactions, business appraisers may have to use their own judgment to derive this value from comps.
Of course, all these points and more are made in The Comprehensive Guide to the Use and Application of the Transactions Databases by Nancy Fannon and Heidi Walker, who have continually warned about the errors appraisers can make by simply averaging comparables, for the obvious reason that not all sellers and buyers structure deals with similar terms. To view the table of contents and order the new Guide, click here.
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