When C. Fred Hall III (Amador Appraisals and Acquisitions) began his business valuation career, he was “frustrated” by the market approach. “I found that the values calculated by the gross revenue multipliers were either considerably higher than the values calculated by the cash flow multipliers, or the gross revenue multiplier values were considerably lower. I had to reconcile two values that were often at opposite ends of the spectrum—and each was clearly wrong.”
Over time, he found that “using three regression analyses significantly improved the market approach.” A regression analysis can identify outliers within an initial selection of comparables, which, in turn, helps produce a smaller, “sanitized,” and more accurate sample. Using the formula produced by a regression analysis, BV appraisers can also plot a company’s variables on a graphic representation of the subject market. This “regression market line enables us to determine the probable value of the subject company,” Hall writes. Look for his complete article, “How Regression Analysis Makes the Market Approach More Valuable,” in the April 2012 Business Valuation Update.
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