The vast majority of respondents (95.6%) to our recent online poll say they routinely consider the market approach—i.e., the application of private company transactions data as well as guideline public company data—to help reach an ultimate conclusion of value for a subject private company. Of these respondents, 85% consult Pratt’s Stats, while 62% also use BIZCOMPS and 45% use the IBA database. Not surprisingly, most survey participants said that a lack of sufficient comparables might lead them to reject the market approach in any case or simply use it as a “sanity check.” Other reasons: The subject company doesn’t have access to public markets, is insolvent, is in the early stages of development, or is in a niche industry. “I don’t use transactional data at all,” said one respondent, “unless there are a LOT (at least 30) of transactions within an attenuated time frame (three years, max).”
The range of comments about the reliability of market data went to both extremes. “The existing databases are pure, unadulterated garbage, hyped up as something reliable to all the ignorant CPA/appraisers in the BV business when they are anything but,” said one. “Any data helps,” said another, while still another respondent said: “The market approach is one of the most objective resources a valuator can use to value a business. The income approach is subjective in so many respects.” Consider these comments from respondents as well:
- Public guideline companies are in a different stratosphere when it comes to the size of the companies we value, so I do not use that method. I will always consider the private market data, but if there are too few transactions in a particular industry, or the data points are too widespread to determine true industry multiples, I will reject the method.
- I find it extremely difficult to apply market data to a small business, unless there is an overwhelming amount of data. The subjectivity of expense classifications, discretionary expenses, and lack of detail make any comparisons almost meaningless.
- In our opinion, transaction data MUST be considered. EVEN IF you can't get sufficient reliable “numbers,” you can still get an idea of activity in the market, which is very useful to know.
- Ultimately, there is no perfect answer, other than the price after a sale. Since we are tasked to value the company without knowledge of a sale, we must provide our best estimate. However, it is just an opinion, and the imperfect data from the market approach is often good enough to help form a reasonable opinion.
- Generally, specific transaction data has not been very useful to me over the years … other than sanity check info. There are just too many problems with getting apples-to-apples comparisons.
- Market data is useful in gauging the terms and structure of transactions. For example, if the value of the subject is $X, how would a buyer and seller structure a transaction for $X?
- Ninety-nine percent of the time I reject the public transaction data as comparables are simply too big to compare to a smaller firm. Seventy-five percent of the time I only utilize the private transaction data as a reasonableness check on the income approach. Most of the data from the leading databases is quite old, but if value is similar to income approach, I might apply secondary weighting to the market approach to hedge my bets. I think most appraisers fall into this pattern.
- Examination and consideration of market data is an important part of most business valuations. The data is not perfect, and much may not be known about a given transaction, but it is what many buyers, sellers, and intermediaries use to price and justify value. In each case, it is the appraiser's judgment that is most important in interpreting and applying the information derived from various market transaction data sources.
Given the continued interest in (and extremes of) the debate on the market approach, we’ve left our online survey open. Please take the time to add your answers and comments; we’ll continue to highlight the results next week—in particular, how appraisers use market data to calculate capital inputs for their subject company. We’ll also feature the complete survey results in “The Market Approach Today: Deciphering Messages From the Courts, and Common Appraisal Errors,” featuring Robert Schlegel (Houlihan), Alina Niculita (SPV), and Chris Treharne (Gibraltar) on August 2.
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