The number of responses nearly doubled after keeping our online survey open for an additional week. But the percentages allocated among the answers remained the same, indicating a consistency among BV professionals on how they use and view the market approach and data. “I never reject the market approach,” said one respondent, who represents the 95% of BV professionals who use the market approach in their valuations of private companies. But lack of sufficient comparables and/or details behind private transactional data still frustrate some, as this one said:
Given all the complexities that go into what is behind the numbers of the “comparable” companies and given that the accounting I usually receive is not [always GAAP-compliant], it is difficult to ever use market approaches for anything other than sanity checks. You can spend days trying to reconcile the guidelines to your company and still never come close because there is just not enough information available about the guidelines to make useful conclusions.
When asked whether they consider guideline public company data to derive inputs for the income approach—specifically, to help determine a capital structure for the subject company—respondents were split, with approximately 48% saying “yes” and 42% answering “no.” The remaining 10% checked off the third option (“other”), indicating that the answer largely depends on the nature of the subject company and its access to public markets. “Yes and no,” said one in this camp. “If the data are comparable, yes. But many times the nature of the subject is either too small or too specialized to assume that the public company data are comparable.”
Just over three-quarters (76.1%) of respondents do not consult private transactions data to determine cost of capital inputs for a subject company. At the same time, the vast majority (92%) say they do use public company data (e.g., from Ibbotson’s or Duff & Phelps). “Yes!” answered one:
The use of public company data to determine an equity risk premium or size premium is different than the use of public company data in the market method. In the buildup method, for example, public company data are used to determine the risk characteristics of different classes of investments. [The analysis] does not involve comparing specific public companies to the subject private company.
Get current with the uses (and misuses) of the market method: Tune in to The Market Approach Today: Deciphering Messages From Markets, Courts, and Common Appraisal Errors, featuring Robert Schlegel (Houlihan), Alina Niculita (SPV), and Chris Treharne (Gibraltar), on Thursday, August 2.