Valuation practices revealed in new Pepperdine report

BVWireIssue #147-3
December 17, 2014

p>Over the past year, business appraisers saw an increase in the number of engagements, higher fees for services, and more competition, according to the “2015 Capital Markets Report from Pepperdine. This annual report surveys business appraisers, brokers, banks, private equity groups, business owners, and investors in order to benchmark the current climate and projected outlook for lending, investing, and acquiring capital.

Appraisers say that domestic economic uncertainty is the most important issue facing privately held businesses today. Other interesting findings include:

  • The most popular methods used to value a business are the discounted future earnings method (37%), capitalization of earnings method (24%), and guideline company transactions method (17%);
  • Recast (adjusted) EBITDA multiple is the most popular when using the multiple valuation method; and
  • Appraisers use an average risk‐free rate of 3.4% and a market (equity) risk premium of 6.1% Average long‐term terminal growth is estimated at 3.3%.

Small businesses and investors predict improved business conditions and an increased demand for capital in 2015, says the report. But the lack of access to funding will remain a challenge to business owners, which will hinder growth.

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