Pratt's Stats Frequently Asked Questions (FAQs)
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Q: What is the legend for Pratt's Stats Transaction Details?
|Contributor Name||The name of the business broker or business intermediary that was involved with the sale of the business. This intermediary provided the sale details to Pratt's Stats.|
|Acquirer Name||The name of the acquiring company.|
|Acquirer Type||Denotes whether the acquirer was a private company or individual, or whether the acquirer was a public company.|
|Target Name||The name of the acquired business.|
|CIK||The Central Index Key (CIK) is a unique SEC identifier for the public acquiring company.|
|8-K Date||The date of the public buyer's Current Report discussing the acquisition.|
|8-K/A Date||The date of the public buyer's Amended Current Report discussing the acquisition.|
|Other Filing Type||Type of other SEC filing that reports information regarding the acquisition.|
|Other Filing Date||The date of the other filing type.|
|Contributor Company||The name of the firm with whom the business broker or business intermediary works. This is not the name of the acquirer.|
|SIC 1||The primary four-digit Standard Industrial Classification (SIC) code associated with the description of the acquired business. Go to http://www.osha.gov/oshstats/sicser.html to search for an SIC code.|
|SIC 2 and SIC 3||The secondary and tertiary SIC codes for the acquired business based on additional services/products that generate less revenue than the primary SIC code.|
|NAICS 1||The primary North American Industry Classification System (NAICS) code associated with the description of the acquired business. Go to http://www.census.gov/eos/www/naics/ to search for a NAICS code.|
|NAICS 2 and NAICS 3||The secondary and tertiary NAICS codes associated with the acquired business based on additional services/products that generate less revenue than the primary NAICS code.|
|Target Business Description||The description of the acquired business.|
|Sale Location||The geographic location of the acquired business.|
|Target Region||The region of the acquired business. The list of state/region associations are as follows:
|Years in Business||The number of years the acquired business has been in operation.|
|Number of Employees||The number of employees working in the acquired business.|
Q: What is the legend for Pratt's Stats income data?
All dollar figures are in whole numbers, not thousands or millions.
|Data is "Latest Full Year" Reported||Indicates that the Income data reflects the latest reported full year financial statement.|
|Data is Restated||Indicates that, for broker submitted transactions (see Source Data section on detailed transaction report to determine if the transaction was submitted by a broker or retrieved from SEC filings), the income data has been recast in order to normalize the financial statement. This may include adjustments such as bringing owner's compensation or rent payments to reasonable levels. For transactions collected from the SEC website, this indicates that certain items have been corrected or changed as they may have been misstated in the prior publishing of the financial statement. The Pratt's Stats® notes field may contain further details pertaining to the restatements.|
|Income Statement Date||Date of the last filed Income Statement.|
|Net Sales||Annual Gross sales, net of returns and discounts allowed, if any.|
|Cost of Goods Sold||The cost of the inventory items sold during the year. Net of any discounts, returns or write-offs.|
|Gross Profit||[Net Sales] - [Cost of Goods Sold]|
|Yearly Rent||Annual cost of occupying all space necessary for operation of the business.|
|Owner's Compensation||Annual income, salary or wage paid to one business owner.|
|Other Operating Expense||All selling and general and administrative expenses, excluding Rent, Owner's Compensation and Depreciation/Amortization.|
|Depreciation/Amortization||Annual decrease in value due to wear and tear, decay or decline in the price of a tangible and/or intangible fixed asset.|
|Total Operating Expenses||[Rent] + [Owner's Compensation] + [Depreciation/Amortization] + [Other Operating Expenses]|
|Operating Profit||[Gross Profit] - [Total Operating Expenses]|
|Interest Expense||Cost of borrowing expressed as an annual dollar amount. (Does not include interest earnings. If the company had interest earnings, you will find that value in the Interest Income field.)|
|Interest Income||Interest revenue, expressed as an annual dollar amount, from any investments the entity makes, or on debt it owns.|
|Other Non-Operating Expenses||Any losses from sources not related to the typical activities of the business or organization.|
|Other Non-Operating Income||Any gains from sources not related to the typical activities of the business or organization.|
|Earnings Before Taxes||[Operating Profit] - [Interest Expense] + [Interest Income] - [Other Non Operating Expenses] + [Other Non Operating Income]|
|Tax Expense||Annual value of tax expense. This figure only includes income taxes and does not include sales taxes, property taxes, payroll taxes, etc. (Does not include an income tax benefit. If the company had a tax benefit, you will find you will find that value in the Tax Benefit field.)|
|Tax Benefit||Annual value of tax benefit.|
|Net Income||[Earnings Before Taxes] - [Tax Expense] + [Tax Benefit]|
Q: What is the legend for Pratt's Stats Asset data?
All dollar figures are in whole numbers, not thousands or millions
|Balance Sheet Date||Date of most recent balance sheet reported.|
|Cash and Equivalents||All cash, marketable securities, and other near-cash items. Excludes sinking funds. Cash equivalents (NOW accounts and money market funds) must be available upon demand in order to justify inclusion.|
|Trade Receivables||All accounts from trade, net of allowance for doubtful accounts, that will result in the collection of cash.|
|Inventory||Anything constituting inventory for the firm including raw material, work in progress and finished goods. Those items of tangible property which are held for sale in the normal course of business, are in the process of being produced for such purposes, or are to be used in the production of such items.|
|Other Current Assets||Any other current assets, excluding Cash and Equivalents, Trade Receivables and Inventory.|
|Total Current Assets||[Cash and Equivalents] + [Trade Receivables] + [Inventory] + [Other Current Assets]|
|Fixed Assets||All property, plant, leasehold improvements and equipment, net of accumulated depreciation or depletion.|
|Real Estate||Dollar value placed on any real estate associated with the sale of the business. The real estate value is not included in the MVIC.|
|Intangibles||Assets with uncertain or hard-to-measure benefits such as brand names, trademarks, patents or copyrights, a trained workforce, special know-how, and customer or supplier relationships, that make the company a viable competitor and give it earning power. These values are net of accumulated amortization.|
|Other Non-Current Assets||Any other non-current asset, excluding Real Estate, Fixed Assets, Intangibles, a Noncompete Agreement and an Employment/Consulting Agreement.|
|Total Assets||[Total Current Assets] + [Real Estate] + [Fixed Assets] + [Total Intangibles] + [Other Noncurrent Assets]|
|Current Liabilities||Any monies owed that are payable on demand within one year. Includes the current portion of long-term debt.|
|Long-term Liabilities||Any monies owed that are not payable on demand within one year. The current portion of long-term debt is a current liability, as distinguished from a long-term liability.|
|Total Liabilities||[Current Liabilities] + [Long-term Liabilities]|
|Stockholder's Equity||Paid-in capital, donated capital, and retained earnings less the liabilities of the company. Stockholder's Equity = [Total Assets] - [Total Liabilities]|
Q: What is the legend for Pratt's Stats purchase price allocation data?
All dollar figures are in whole numbers, not thousands or millions
|Purchase Price Allocation Date||Date for which the purchase price allocation was reported.|
|Cash and Equivalents PPA||All cash, marketable securities, and other near-cash items acquired. Excludes sinking funds. Cash equivalents (NOW accounts and money market funds) must be available upon demand in order to justify inclusion.|
|Accounts Receivable PPA||All accounts from trade, net of allowance for doubtful accounts, that were acquired.|
|Inventory PPA||Anything constituting inventory for the firm including raw material, work in progress, and finished goods that were acquired. Those items of tangible property which are held for sale in the normal course of business, are in the process of being produced for such purposes, or are to be used in the production of such items.|
|Other Current Assets PPA||Any other current assets that were acquired, excluding Cash and Equivalents PPA, Trade Receivables PPA, and Inventory PPA.|
|Total Current Assets PPA||[Cash and Equivalents PPA] + [Trade Receivables PPA] + [Inventory PPA] + [Other Current Assets PPA]|
|Fixed Assets PPA||All property, plant, leasehold improvements and equipment acquired, net of accumulated depreciation or depletion.|
|Real Estate PPA||The value placed on any real estate acquired in the sale of the business. The real estate value is not included in the MVIC price.|
|Customer Relationships/Lists PPA||The value attributed to any customer relationships or customer lists acquired as part of the acquisition.|
|Backlog PPA||Any acquired purchase orders or booked sales on orders that have not been fully completed.|
|Developed / Existing Technology PPA||Any acquired developed/completed technology, core technology, and/or acquired or purchased technology. Technology that is in the process of being developed is included in In-Process R&D.|
|In-Process R&D PPA||Intangible assets acquired relating to any uncompleted/in-process research and development.|
|Trade Names / Trademarks PPA||The value of acquired trademarks/service marks to identify and/or differentiate goods and services or business trade names.|
|Noncompete Agreements PPA||The value placed on an agreement with the selling party not to compete with the purchaser, usually for a certain period of time and usually in a specified geographic area.|
|Other Intangibles PPA||Any other intangible asset acquired that is not listed in the preceding fields.|
|Total Identifiable Intangibles PPA||The sum of all the identifiable intangible assets acquired.|
|Goodwill PPA||Represents the excess of the aggregate purchase price over the fair value of net assets of the acquired business.|
|Total Intangibles PPA||[Total Identifiable Intangible Assets PPA] + [Goodwill PPA]|
|Other Non-Current Assets PPA||All other non-current assets acquired not already identified and included in the preceding purchase price allocation fields.|
|Total Assets PPA||The value off all assets acquired, both tangible and intangible.|
|Interest-Bearing Liabilities PPA||The value of all interest-bearing liabilities assumed. In addition to long-term debt, includes the current portion of long-term debt, as well as any other current liabilities bearing interest.|
|Total Liabilities PPA||The sum of all the seller's liabilities assumed by the buyer.|
Q: What is the legend for Pratt's Stats other data?
All dollar figures are in whole numbers, not thousands or millions
|Date Sale Initiated||Date business was listed for sale.|
|Date of Sale||Date sale of business was closed.|
|Days to Sell||The number of days it took the business to sell. The difference between Date Sale Initiated and Date of Sale.|
|Asking Price||Price desired by seller at time of listing.|
|MVIC (Market Value of Invested Capital)||Also known as the selling price, the MVIC is the total consideration paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer. The MVIC price includes the noncompete value and the assumption of interest-bearing liabilities and excludes (1) the real estate value and (2) any earnouts (because they have not yet been earned, and they may not be earned) and (3) the employment/consulting agreement values. In an Asset Sale, the assumption is that all or substantially all operating assets are transferred in the sale. In an Asset Sale, the MVIC may or may not include all current assets, non-current assets and current liabilities (liabilities are typically not transferred in an asset sale). Transactions with information in the Purchase Price Allocation section will provide definitive information as to what was included in the asset sale. An appraiser can also look to the Additional Notes field to see if a purchase price allocation is presented there. If there is no purchase price allocation available for the transactions, the appraiser will need to use his/her experience and knowledge in the field and the buyer's/seller's knowledge and experience with his/her business to determine what is customarily transferred in an asset sale in that industry.|
|Debt Assumed||Those interest-bearing financial liabilities that the buyer assumes upon the purchase of the company. Includes the current portion of long-term debt.|
|Amount Down||Dollar value of consideration given as a down payment.|
|Employment/Consulting Agreement Value||Dollar value placed on an agreement between the buyer and seller for the seller's personal services to be provided to the buyer either as an employee or consultant after the sale of the business. The Employment/Consulting Agreement is not included in the MVIC.|
|Employment/Consulting Agreement Description||The description of the seller's agreement to provide services or training to the acquirer or acquiring company.|
|Noncompete Agreement Value||Dollar value placed on an agreement with the selling party not to compete with the purchaser, usually for a certain period of time and usually in a specified geographic area. The Noncompete Agreement value is included in the MVIC.|
|Noncompete Agreement Length||The duration, presented in months, that the seller has agreed not to compete with the acquirer or acquiring company.|
|Noncompete Description||The specific geographic area that the seller has agreed not to compete with the acquirer or acquiring company.|
Q: What is the legend for Pratt's Stats company structure data?
|C Corp||A corporation acting as a separate entity, for income tax purposes.|
|S Corp||A corporation with restrictions on equity ownership.|
|LLC||A Limited Liability Company is one wherein the members have limited legal liability and may participate in the management of the organization.|
|Partnership||A business comprised of two entities, either created as a general partnership or limited partnership.|
Q: What is the legend for the Pratt's Stats valuation multiples and financial ratios calculations?
|Valuation Multiple||Database Calculation|
|MVIC / Net Sales||[MVIC] / [Net Sales]|
|MVIC / Gross Profit||[MVIC] / [Gross Profit]|
|MVIC / EBITDA||[MVIC] / ([Operating Profit] + [Depreciation/Amortization])|
|MVIC / EBIT||[MVIC] / ([Operating Profit])|
|MVIC / Discretionary Earnings||[MVIC] / ([Operating Profit] + [Owner's Compensation] + [Depreciation/Amortization])|
|MVIC / Book Value of Invested Capital||[MVIC] / ([Total Assets] - [Total Liabilities]) + [Long-term Liabilities]|
|Financial Ratio||Database Calculation|
|Net Profit Margin||[Net Income] / [Net Sales]|
|Operating Profit Margin||[Operating Profit] / [Net Sales]|
|Gross Profit Margin||[Gross Profit] / [Net Sales]|
|Return on Assets||[Net Income] / [Total Assets]|
|Return on Equity||[Net Income] / ([Total Assets] - [Total Liabilities])|
|Fixed Charge Coverage||[Operating Profit] / [Interest Expense]|
|Long-term Liabilities to Assets||[Long-term Liabilities] / [Total Assets]|
|Long-term Liabilities to Equity||[Long-term Liabilities] / ([Total Assets] - [Total Liabilities])|
|Current Ratio||[Total Current Assets] / ([Total Liabilities] - [Long-term Liabilities])|
|Quick Ratio||([Total Current Assets] - [Inventory]) / ([Total Liabilities] - [Long-term Liabilities])|
|Total Asset Turnover||[Sales] / [Total Assets] (see Purchase Price Allocation Q & A below)|
|Fixed Asset Turnover||[Sales] / [Fixed Assets] (see Purchase Price Allocation Q & A below)|
|Inventory Turnover||[Sales] / [Inventory] (see Purchase Price Allocation Q & A below)|
Q: I noticed that some of the field names, as well as their placement, have changed within the Pratt's Stats Excel Export. Can you provide me with a crosswalk between the old field names and new field names?
A: The Pratt's Stats database underwent a significant update in January 2016. A crosswalk between the old field names and new field names can be found here.
Q: Are all the deal prices reported in Pratt's Stats truly MVIC prices? Do I need to add unassumed debt to the provided MVIC prices? Can I convert MVIC Prices to equity prices?
A: In the Pratt's Stats database, the MVIC price for asset sales and stock sales are being reported correctly. You will never add the value of unassumed interest-bearing liabilities to the reported price. Doing so will overstate the price and create over-inflated multiples. A user of the database will also not want to convert the given MVIC price to an Equity Price. Applying equity multiples assumes the same capital structure and proportion of debt between the subject company and the comparable. Often this is not the case. It is advisable to apply an MVIC multiple to the subject and then subtract the subject's interest-bearing liabilities (note that the user will next need to look at what transferred in the comparable sale and make adjustments accordingly to the subject's final value).
Here is an example of why you would not add the unassumed debt: Company X buys Company Y for $20M in cash. Company Y has $10M in debt on their books, but Company X does not assume this debt. Because this debt is not assumed, Company Y uses the proceeds of the cash sale to pay off their debt of $10M. The MVIC price for this acquisition is $20M not $30M. Adding the unassumed debt of $10M would overstate the price paid for the assets of the company and would cause an over-inflated MVIC price. The MVIC price will only include those interest-bearing liabilities that are assumed, not those that are retained by the seller.
Nancy Fannon, ASA, CPA, ABV, MCBA, in her webinar presentation, Transaction Databases (October 23, 2008), stated, "In order to be an invested capital price, it need not be 'plus debt.' The important thing is that it is not net of debt." She went on to say, "Resist the urge to 'subtract debt' that was not assumed [from the reported MVIC price] in order to 're-create' an equity multiple when using Pratt's Stats."
Q: What are the assumptions for Pratt's Stats data?
- N/A indicates that the data in question were not available. Please see assumption number 4 below for one caveat to this.
- A dollar value of zero has been expressly specified as zero.
- If it cannot be definitively determined if there was any reported debt assumed, the assumption is made that there was either zero debt assumed or that there was insignificant debt assumed such that it would not make a material difference in the calculation of an MVIC price.
Q: Are the transactions that are submitted by business intermediaries and M&A advisors to Pratt's Stats reviewed by BVR staff? If so, what is the screening process for submitted transactions?
A: Yes, every transaction that is submitted to BVR for inclusion within Pratt's Stats is reviewed carefully by BVR financial analysts. Each transaction is thoroughly reviewed for required inclusion and exclusion criteria and is formatted for consistency (please see the FAQ question,
"What, if any, inclusion criteria and exclusion criteria does Pratt's Stats use in its data collection process?" for more information about the Pratt's Stats inclusion criteria and exclusion criteria). If necessary, BVR personnel will contact the submitting business intermediary with any follow up questions. When any necessary questions have been answered and all of the inclusion criteria have been met, the transaction is then ready for inclusion within Pratt's Stats. Unless the intermediary specified they want their personal information to remain confidential, each submitted transaction will contain the business intermediary's name and firm name, along with a link to contact the business intermediary.
Because of the comprehensive screening criteria, BVR has built strong relationships with its contributing business intermediaries. The majority of contributing intermediaries are members of the International Business Brokers Association (IBBA) and hold their CBI (Certified Business Intermediary) designation, and members of M&A Source who hold their Merger and Acquisition Master Intermediary (M&AMI) designation.
Q: What, if any, inclusion criteria and exclusion criteria does Pratt's Stats use in its data collection process?
A: The inclusion criteria for Pratt's Stats transactions is as follows:
- Acquired company must be private (note: acquiring firm/party can be either private or public)
- Date of sale must be disclosed
- The selling price has to be clear (i.e. if restricted stock is part of the consideration, the value of the restricted stock issued in the transaction must be given, etc.)
- Earn outs (or contingency payments) cannot be included in the selling price; if the earn outs cannot be removed from the given selling price then the transaction will not be included
- Product/Service description of the seller must be disclosed
- The income statement must cover 12 months of operations and cannot be an estimate, a pro forma, or annualized
- Company type must be disclosed (C or S Corp, LLC, LLP, Sole Prop. etc.)
- The type of transaction must be disclosed; either a stock or asset sale
- The transaction must not be a reverse acquisition, reorganization, recapitalization etc.
- Must be 100% acquisition (no partial transactions)
- Avoid transactions where the consideration is mostly for real estate. If any transaction includes the value of real estate and buildings as part of the selling price and BVR can determine their value, BVR will deduct the real estate value from the selling price
Q: Where does Pratt's Stats get its data and how are the data verified?
A: Pratt's Stats obtains transactions for the database via three tracks. (1) Business brokers and M&A advisors who have been involved in business transfers contribute details on their closed deals to Pratt's Stats. (2) BVR personnel travels to offices of business brokers to collect details from the intermediaries' files. (3) BVR personnel performs research at the Security and Exchange Commission's (SEC) website and collects details on private-company acquisitions by public companies. The transactions Pratt's Stats receives from business brokers are typically private-company "main street" business transactions and the private company acquisitions collected from the SEC website or from M&A advsisors are typically private company merger and acquisitions (M&A) transactions.
Many of the contributing business brokers are members of the International Business Brokers Association (IBBA) and hold their CBI (Certified Business Intermediary) designation. In every possible circumstance, Business Valuation Resources, LLC, relies on audited financial information conforming to U.S. GAAP (Generally Accepted Accounting Principles). Before a transaction is included in Pratt's Stats, each transaction is carefully reviewed by BVR personnel.
When a transaction is included in Pratt's Stats, information on the source is disclosed. If the deal was sourced from SEC filings, there will be information documenting which filings were used as well as a link to view the filings. If the deal was contributed by a business broker or M&A advsior, the transaction will list the contributor's name and firm and will provide a link to contact the contributor (unless they asked for their information to remain confidential).
Q: If I am a business intermediary who would like to contribute to Pratt's Stats, how do I do so?
A: Please visit our contributor page to learn about the benefits of submitting, register to create a profile, and submit closed transaction data.
Q: Is there a way to know if the income data in Pratt's Stats are based upon tax return data or internally generated financial statements?
A: If the data were collected from a business broker, it can be either internally generated financial statements or income data from a tax return, though the majority of the time the income data comes from internally generated financial statements. If the data was collected from the SEC website, the income data will typically be audited internally generated financial statements. If you look at the "Source Data" section of the transaction report, you can verify whether the deal was collected from a business broker or from the SEC website.
Q: What does it mean when the "Contributor Name" field is left blank on the Pratt's Stats transaction report?
A: For confidentiality reasons, some brokers ask that their name be left off the Pratt's Stats transaction report. In these cases, we are unable to report or provide the broker's name to users.
Q: In Pratt's Stats, when you research SEC documents where public companies purchase private companies, are you capturing all of the deals, or are you unable to capture some?
A: There are certain instances where the registrant is not required to include the financial statements for the acquisition, so these transactions are not captured in Pratt's Stats. Without financial statements, Pratt's Stats cannot compute valuation multiples. If the acquisition is not considered "significant", as defined in the Securities and Exchange Commission's REGULATION S-X 11.01 (b) of Regulation S-X, it is not mandatory for financial statements to be included in the buyer's filings. The SEC determines a "significant" business disposition as one that meets the requirements and conditions of a significant subsidiary in 210.1-02 (w). In an acquisition, the acquired (or to be acquired) business must be considered a significant subsidiary when the financial statements of the seller and registrant are compared. A significant subsidiary is determined under the conditions specified in 210.1-02 (w), substituting 20 percent for each place 10 percent appears.
Q: I see the Pratt's Stats advanced search page has an option to search by "Source." What are the various sources listed?
- AM&AA - Alliance of Merger & Acquisition Advisors
- BBF - Business Brokers of Florida
- GABB - Georgia Association of Business Brokers
- IBBA - International Business Brokers Association
- M&A Source - a specialized group within the International Business Brokers Association
- Other - none of the others
- SEC - Securities and Exchange Commission
- SEDAR - System for Electronic Document Analysis and Retrieval (Canada's equivalent of the SEC)
Q: When conducting a search on the Pratt's Stats search page, can I specify that I want only SEC-sourced deals? In other words, can I search by only those public buyers of private companies that were sourced from the SEC website?
A: Yes. On the Pratt's Stats advanced search page, select "SEC" from the "Source" field. This will retrieve the SEC sourced deals. These transactions also have links to the public buyers' filing pages with the SEC's EDGAR database, so a user can verify the information contained in Pratt's Stats transaction reports or search for additional information. As of October 2015, approximately 30% of all transactions in the Pratt's Stats database were sourced from the SEC (as opposed to being collected from business brokers). These transactions provide extensive, verifiable information well-suited for litigation work.
Q: Which filings does Pratt's Stats use to capture the income statement data, balance sheet data, and purchase price allocation data, and transaction data for deals sourced from the Securities and Exchange Commission (SEC) website?
A: While other filings may be used, Pratt's Stats commonly uses the following filings: 8-K; 8-K/A; 10-Q; 10-K; and S-1. The filings used, as well as the dates they were filed with the SEC, are included in the Source section for each transaction documented from the SEC website. Pratt's Stats uses the most recently available transaction and purchase price allocation data as of the date the deal was documented by Pratt's Stats staff. Sometimes, after the deal has been closed and is documented by Pratt's Stats staff, the acquirer may make changes to the purchase price allocation based on revaluations of the assets acquired and liabilities assumed. While Pratt's Stats does not monitor every future modification to the various deals' purchase price allocations, appraisers, if they wish to, can use the Source section of each deal to find the public company buyer's main SEC filing page in order to locate changes to purchase price allocations that occurred at a date after the deal was documented by Pratt's Stats.
Q: Can you please discuss the difference between the mean and the median and how I may interpret the mean and median values of the search results?
A: Click here to download a PDF with a comprehensive explanation.
Q: I see that you show the harmonic mean in the transaction summary table results for the valuation multiples. What is the harmonic mean?
A: In the transaction summary of the subscriber search results we present medians, averages, coefficients of variation and harmonic means, depending on the data. Many practitioners and academics believe the harmonic mean is a better measure of central tendency for valuation multiples than the mean (the arithmetic average) or median (the middle value in a series). Quoting Wikipedia:
The harmonic mean is the preferable method for averaging multiples, such as the price/earnings ratio, in which price is in the numerator. If these ratios are averaged using an arithmetic mean (a common error), high data points are given greater weights than low data points. The harmonic mean, on the other hand, gives equal weight to each data point.
Shannon P. Pratt writes on page 140 of his second edition of The Market Approach to Valuing Businesses:
Although the harmonic mean is not used frequently, probably because it is unfamiliar to most readers of valuation reports, it is conceptually a very attractive alternative measure to central tendency.
In addition, Gilbert Matthews of Sutter Securities Inc. wrote an article in the June 2006 Business Valuation Update issue that explains what the harmonic mean is and provides a detailed example. Mark G. Filler of Filler & Associates P.A. replied to Mr. Matthews in the August 2006 Business Valuation Update. In addition, Mr. Matthews was quoted in the July 2001 Business Valuation Update as follows:
The harmonic mean is preferable in any ratio in which price is the numerator. For yields, when the price is in the denominator, an arithmetic mean is correct. An example is the “earnings yield” (EPS/P) rather than PE used by the British. If price is the numerator, the result is an inverted ratio for which the harmonic mean is statistically a more appropriate measure of central value. The harmonic mean gives an equal weight to an equal investment in each company, while the arithmetic mean gives three times the weight to a multiple of 30x compared to a multiple of 10x. For most other uses in valuation, the arithmetic mean is appropriate. For a fuller discussion, see “Fairness Opinions”1 by Mark M. Lee and Gilbert E. Matthews and page 139 and 140 of the Second Edition of The Market Approach to Valuing Businesses by Shannon Pratt.
1“Fairness Opinions” (Gilbert E. Matthews and M. Mark Lee), in The Handbook of Advanced Business Valuation, R. Reilly and R. Schweihs, eds. (McGraw Hill, 2000).
Lastly, here is an example that is provided by Toby Tatum and is representative for the business valuation profession.
When calculating the average selling price (SP) to earnings ratios for businesses within a defined industry let’s assume the known selling price to seller’s discretionary earnings (SDE) for one comparable company is 3.0 times earnings and for another it is 2.0 times earnings. The object of the exercise is to determine, on average in a defined industry, what a business is worth based on a given level of earnings. The arithmetic average of these two is 2.50 times earnings. This suggests that if a business has an SDE of $100,000 it is worth $250,000.
Now, do the math for each business purchase separately. Assume the first buyer paid $300,000 for a business with an SDE of $100,000 (i.e., 3.0 times SDE). Assume another buyer paid $300,000 for a business with annual SDE of $150,000 (i.e., 2.0 times SDE). The total price paid for both businesses is $600,000 and the total SDE purchased is $250,000. This yields an average SP/SDE ratio of $600,000 divided by $250,000 or 2.40 x SDE. 2.40 is the harmonic mean value of the Selling Price to Seller’s Discretionary Earnings in this industry. Thus we can conclude that, on average in this industry, if a business has an SDE of $100,000, it is worth $240,000, or for every $1.00 in SDE, the seller gets $2.40 (and not $2.50 as computed via the arithmetic mean above). Therefore, if one is to assume that the fair market value of a subject company is equal to the “average” selling price to earnings ratio for the comparable transactions selected to represent that industry, then the multiple to apply against the known earnings of the subject company must be the harmonic mean value of the comparables, and not the arithmetic mean.
Q: Would you please explain the "coefficient of variation" and how we should utilize and interpret each calculation?
A: The coefficient of variation = standard deviation/mean (the mean is also known as the average).
The coefficient of variation is a measure of dispersion around the mean (average).
The theory is that the valuation multiples with the lowest coefficient of variation are those with the least dispersion around their respective means and may be the better indicators of value. The value derived using these valuation multiples may be weighted more heavily than those with larger coefficient of variations.
Q: The SIC code I searched only contains a few transactions and may not be a reliable base for benchmarking values. Can you please comment?
A: In Gilbert E. Matthews' presentation titled Fairness Opinions dated April 2, 2001 he writes:
"As companies broaden their range of activities, it is often not possible to find other companies with the same mix of businesses. It may be necessary to rely on companies which could be described as "secondary comparables," i.e., companies with significant similarities but which differ in certain substantive respects from the subject company. Sometimes companies which make different products than the subject company produces, but which serve the same markets, can be useful as comparable companies."Shannon Pratt writes:
"The court accepted the guideline companies for all three experts in the Estate of Gallo (wine), even though only one of the comparables was in the same business as the subject company." "All experts chose distilling and brewing companies. In addition to these companies, the IRS expert chose companies in the food processing industry."
"Hallmark Cards, Inc., was the subject company in the Estate of Hall." "Petitioner's experts also chose comparable companies, which the court accepted, that 'produced brand name consumer goods, were leading companies in their industries, had publicly traded common stock, had financial characteristics similar to Hallmark' and were 'highly regarded by the investment community for their quality management, leading market positions, and excellent financial conditions.' Examples of these guideline public companies include Avon, McDonalds, Anheuser-Busch, IBM and Coca-Cola."
Pratt, Shannon. The Market Approach to Valuing Businesses, Second Edition New York: Wiley, John & Sons, Inc., 2005. pp. 282-283.
Q: Why should I look at the details of each transaction in the Pratt's Stats database?
A: This is important because the MVIC prices do not indicate values for the same bundles of assets and liabilities for every transaction. Pratt's Stats reports deals as they occurred, which means that each deal can represent different groupings of assets (and potentially liabilities), from one to another. In order to use the data, you should look at the transaction report to see what transacted. You can discern this either by looking at the purchase price allocation section in the middle-right of the transaction report which indicates the actual assets acquired in the transaction. Also, you can find this information in the Additional Notes field of the transaction report towards the bottom. Further, an appraiser's experience and knowledge about the transaction type and industry should assist in knowing what typically transacts in a given situation.
Q: Although the Pratt's Stats database contains many automobile dealer transactions for SIC 5511, I have noticed that many of the transactions occurred in the mid to late 90s, with very few recent transactions. What is the reason for this?
A: In the 90s, there was a consolidation in the automobile industry that is reflected in the number of transactions for those years. In the early 2000s there have been very few automobile dealer transactions. Twice monthly we capture all new SEC filings of public buyers and public and private sellers and report all transactions that are 100% acquisitions and meet the criteria to be considered in our database. We have not seen many automobile dealerships change hands over the last few years. Many industries experience peaks and valleys, in terms of transactions, and this may very well be the case with this industry.
Q: How do I pass along to my clients the expenses I incur for guideline company data, control premium data, discount for lack of marketability data, economic data, industry data, etc?
A: Some of our subscribers impose a separate resource/technology charge for every valuation assignment. They know approximately how many appraisals they do per year and divide that number into the [annual] costs of the databases and basic data resources they use, thereby passing along the resource (or technology) charges.
Q: What is assumed to be transferred in an asset sale?
A: Based on our experience with seeing what transfers in asset sales, we make the following assumptions:
- Inventory (if applicable to industry, e.g. a CPA firm may not possess any inventory while a convenience store may)
- Fixed assets
- Leasehold improvements (if any)
- Intangibles (such as trade name, customer lists, etc.)
- Cash and equivalents
- Trade receivables
- Real estate (this value will not be included in the Pratt’s Stats MVIC price if transferred, but will be noted in the additional notes field)
It is important to look at the purchase price allocation and additional notes sections of the Pratt's Stats transaction report to see if a purchase price allocation is given for the sale. This allocation will show you definitively what assets transacted as well as their agreed upon values by the buyer and the seller. A user can also look at a group of transactions in the database by industry or SIC code to see what typically transfers.
Q: What is typically assumed to be transferred in a stock sale?
- Entire legal entity of the company
- All assets and liabilities unless otherwise specified in the purchase agreement
Q: Can you please provide more information about stock versus asset sales?
A: To answer this question, we quote a couple of authors
Scott Gabehart and Richard J. Brinkley write:
The main point is that because of the greater risk of buying a company's stock rather than assets, the purchase price reflects this risk in the form of a lower value.
Generally speaking, the sale of stock is treated primarily as a capital gain, whereas the sale of assets generates a substantial gain (typically) that is taxed in large part as ordinary income. Ordinary income tax rates can be as much as twice as high as the current capital gains tax rate.
For the sake of clarity and understanding, review the following major differences between an asset sale and a stock sale.
- Seller keeps cash and receivables but delivers company free of any debt.
- Seller keeps corporate entity to later dissolve or use for new endeavor.
- Seller pays combination of capital gains tax and ordinary income.
- Buyer and seller agree to allocation of purchase price between IRS asset categories.
- Buyer may redepreciate fixed assets based on allocation.
- Buyer avoids assuming both known and unknown liabilities.
- If price is greater than identifiable, tangible assets, the excess is allocated to one or more intangible assets (written off over fifteen years for tax purposes and up to forty-two for book purposes).
- Seller pays primarily capital gains tax rather than higher ordinary income tax rate.
- Seller endorses stock certificates over to new owner.
- Buyer assumes all assets and liabilities unless specifically excluded.
- Buyer takes on risk associated with unknown liabilities.
- Buyer inherits tax depreciation schedules as they are (for better or mostly worse).
- Buyer may inherit tax loss carryforwards to shield future income.
- There is no allocation of purchase prices or goodwill related to transaction.
Q: If N/A is noted in the debt assumed field, does this mean there were no interest-bearing liabilities assumed?
A: In an asset sale, there are typically no interest-bearing liabilities assumed.
In a stock sale, if the debt assumed field is labeled N/A, Pratt's Stats was not able to definitively determine if there were interest-bearing liabilities assumed. This could indicate the purchaser did not assume any of the seller's interest-bearing financing liabilities, or that the amount of interest-bearing financing liabilities assumed was immaterial relative to the consideration paid. If the debt assumed field shows a zero, the information describing the business sale clearly defined there were no interest-bearing liabilities assumed.
Q: Why are no assumed interest-bearing liabilities included for some transactions that include an interest expense and that are listed as a stock transaction?
A: The income data reported by Pratt's Stats is the latest full fiscal year reported before the date of the closing of the sale. It would be incorrect to extrapolate that the sale included the assumption of interest-bearing financing liabilities from the fact that interest expense was reported for the business before the date of the sale.
Q: I would like to know if the above information means that no interest-bearing liabilities were assumed in the deal or information is simply not available on interest-bearing liabilities assumed with the deal.
A: For asset and stock transactions that have an N/A in the debt assumed field, Pratt's Stats makes the assumption that no interest-bearing liabilities were assumed or the amount of interest-bearing liabilities was insignificant relative to the purchase price.
In an asset sale, there are typically no interest-bearing liabilities assumed.
For stock transactions, Pratt's Stats analyzes purchase price allocations (which are available for approximately 90%+ of the stock transactions in the database) and records any interest-bearing liabilities that were assumed. Pratt's Stats also reviews all relevant filings from the buying firm (where the buyer is a public company with SEC filings), seeking specific language regarding the assumption of interest-bearing liabilities. It is Pratt's Stats belief and understanding that if interest-bearing liabilities were assumed, and if interest-bearing liabilities were significant in the transaction, the acquiring firm would report this to their shareholders and Pratt's Stats would subsequently note this amount in the debt assumed field.
In stock transactions, it is important to note that not all targets are carrying interest-bearing debt. Further, because a target has long-term liabilities on their balance sheet does not mean they possess interest-bearing liabilities (various types of long-term liabilities do not bear interest, such as deferred tax payments). Additionally, the selling shareholders may retain the debt in the business sale, and use the proceeds from the business sale to repay their outstanding debt.
Q: What is the relation between market multiples and capitalization rates?
- Market multiples and capitalization rates are the inverse of each other. For example, if the P/E ratio is 20 times last year's earnings, then last year's earnings are capitalized at 5%: 1/20 = .05 = 5%
- Conversely, if the capitalization rate is 5%, then the market multiple for that variable is 20: 1/5% = 1/.05 = 20X
- Any market multiple can be converted to a capitalization rate, and vice versa. The capitalization rate form of presentation is commonly used in the income approach to valuation. It is more common to use the market multiple form of presentation in the market approach.
Q: When evaluating multiples such as MVIC/EBITDA, how do I know if the owner's compensation has been adjusted to reflect market value?
A: The income statement in Pratt's Stats is either "As reported" or "As restated" - and is indicated as such above the "Net Sales" figure. If the income statement is "As restated" the details as to the restatements are included in the notes field. The majority of the deals in Pratt's Stats are as reported, indicating no adjustments have been made.
Q: If I am using multiples from the Pratt's Stats database to value a closely-held company, would I need to take a discount for lack of marketability or is the multiple assumed to be on a non-marketable basis already?
A: To answer this question, we will quote several passages from Shannon Pratt's The Market Approach to Valuing Businesses (New York: John Wiley & Sons, 2001) [In the below narrative, the "merged and acquired company method" and the "guideline merged and acquired company method" both refer to utilizing information from private company sales, not public company sales]:
"If valuing a controlling interest, a discount for lack of marketability may be appropriate in limited circumstances. There could be significant time and costs that would need to be incurred in order to make the subject company saleable, which could be the basis for a lack of marketability discount." (from Chapter 3, The Guideline Merged and Acquired Company Method, p. 39)
"The merged and acquired company method produces a value on a control basis. A controlling interest is not as readily marketable as a publicly traded stock. Therefore, if valuing a controlling interest, some discount for lack of marketability may be warranted, although if so, it generally would not be as great a percentage as would be appropriate for a minority interest, in fact, probably substantially less.
If the merged and acquired company method is used for valuing a minority interest, usually both a discount for lack of control and also a discount or lack of marketability would be applied, as shown in the schematic levels of value in Exhibit 11.1 (not shown here). These discounts would be applied consecutively, usually first the discount for lack of control to get a minority value, and then the discount for lack of marketability." (from Chapter 12, Discounts for Lack of Marketability, pp. 146-147)
"Using the guideline merged and acquired company method, the analyst arrives at an indicated value for a controlling interest. Even a controlling interest may suffer from lack of marketability. If valuing a controlling interest, the analyst could consider the costs of preparing the company for sale, transaction costs, and the risk of not receiving the expected proceeds as factors in quantifying a discount for lack of marketability from the value of the expected proceeds.
If the analyst is using the guideline merged and acquired company method to value a minority interest, then both a discount for lack of control and a discount for lack of marketability usually are appropriate. These are taken multiplicatively, not additively, that is, they are taken sequentially. Usually the discount for lack of control is applied to a minority value, and then the discount for lack of marketability is applied to the minority value." (from Chapter 12, Discounts for Lack of Marketability, pp. 154-155)
Q: What is the difference between BIZCOMPS and Pratt's Stats?
A: BIZCOMPS mainly covers main street business transactions and includes up to 21 data fields per transaction.
Pratt's Stats covers transactions of main street businesses, middle market transactions, and larger M&A transactions. Pratt's Stats data includes up to 150 data fields per transaction. You can view two comparison charts of the databases.
Q: Does BIZCOMPS overlap Pratt's Stats?
A: There is little overlap of information from BIZCOMPS and Pratt's Stats, although there may be a few transactions that are in each database.
Q: Do BIZCOMPS and Pratt's Stats calculate transaction multiples the same?
A: No. There is one key difference between the two databases. BIZCOMPS sales are all asset sales and the selling price does not include the cash, accounts receivable, accounts payable and inventory. Pratt's Stats sales can be either an asset sale or stock sale. For an asset sale, the Pratt's Stats selling price generally includes inventory and generally excludes cash, accounts receivable and accounts payable. The appraiser may determine what assets transferred in the Pratt's Stats sale by looking at the purchase price allocation section or additional notes field. If a purchase price allocation is available, the appraiser can make a definitive determination as to what assets transferred. If a purchase price allocation is unavailable for an asset sale, the assumption is that the inventory transferred with the sale and that cash, accounts receivable, and accounts payable did not transfer with the sale. For a stock sale, the Pratt's Stats selling price generally includes all operating assets and liabilities. Therefore, when comparing multiples that use the selling price from Pratt's Stats and BIZCOMPS, the above should be taken into consideration and any necessary adjustments should be made
Q: It appears that a business’s “selling price” in each deal and market data database uses different terminology; can you please clarify the “selling price” in each database?
A: Below, we show the term used for the “selling price” in each deal and market data database and its respective definition:
- Public Stats uses the term MVIC (Market Value of Invested Capital) for the “selling price.” The MVIC is the overall consideration in the business sale and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer.
- BIZCOMPS uses one term for the “selling price”; Sale Price. Sale Price is the actual sale price ($000's) where inventory has been deducted, if it was included in the sale price.
- Pratt’s Stats uses the term MVIC (Market Value of Invested Capital) for the “selling price.” The MVIC is the overall consideration in the business sale and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer.
- The Mergerstat/BVR Control Premium Study also uses two terms for the “selling price”; the Target Invested Capital (TIC) and Price. The TIC is the target company's implied total invested capital based on the sum of the implied market value of equity plus the face value of total interest bearing debt and the book value of preferred stock outstanding prior to the announcement date. The price is the implied market value of equity.
- The FMV Restricted Stock Study does not report details on the sale of either a portion of a company or an entire company and therefore does not contain a selling price field. Instead, this database reports the details related to transactions in restricted stock. This database does report a Market Value (in $000s) which is the market value of the firm determined on a pre-deal basis. The market value is calculated by multiplying the shares outstanding before the private placement with the high-low average market price for the stock for the month prior to the transaction. The market value is not the selling price, per se, but a calculation of the value of the total equity on the date of the restricted stock transaction.
- The Valuation Advisors’ Lack of Marketability Discount Study does not report details on the sale of either a portion of a company or an entire company and therefore does not contain a selling price field. Instead, this database reports the details related to transactions in common stocks, stock options or convertible preferred stocks prior to an initial public offering, and the relationship of these prices to the IPO price per share (the price of the stock paid by the initial public investors to acquire their shares).
Q: We are Apple users and are not successful in utilizing the Pratt's Stats Analyzer.
A: Unfortunately Apple does not support the VBScript and macros needed for the Pratt's Stats Analyzer to function.
Q: I am trying to utilize the Pratt's Stats Analyzer, but I do not know how to enable macros. Is there a help page that will walk me through how to enable macros?
A: Yes. Please click here to view step-by-step instructions that will help you enable macros for the various generations of Microsoft Excel.
Q: Can I search by more than one SIC code or more than one NAICS code?
A: By pressing and holding down the left mouse button, you can drag your mouse cursor over a series of SIC codes.
By holding down the control button on the keyboard and clicking with the left mouse button on the codes you wish to search by, you can highlight a noncontiguous group of codes.
By selecting a code, holding the shift button, and selecting another code, you can highlight a contiguous group of codes.
Q: Why don't I see my SIC or NAICS code of interest in the search engine's list of SIC codes?
A: The website's search engines use the underlying data to create the list of SIC and NAICS codes. If your SIC or NAICS code is not listed in the search engine, this means there are no transactions with that SIC or NAICS code in the database. You may want to search the other databases to see if they have any helpful data or expand your search criteria to include similar SIC or NAICS codes.
Q: Can I print more than one transaction at a time?
A: To print a group of transactions (the current group size is 25); on the search results page in the list of transactions, utilize the icon that looks like a red piece of paper – it is labeled “Print Detail Report Package”. When printing more than a couple of detailed transaction reports, this will save you time.
Q: I want the transaction reports to fit onto one page, instead of two. What can I do to make this possible?
A: The best solution is to maximize your print margins and print to "legal" size paper (8.5" x 14"). In Internet Explorer the default margin size is 0.75 inches. When you print transaction reports, reduce the print margins to 0.25 inches and most will fit on a single page. Also, you should remove any header/footer information that Internet Explorer includes in web page printouts. The print margins and header/footer settings can be found under File -> Page Setup in Internet Explorer.
Q: Each time after I alter my search of the database and I ask for a printable format, the results of my very first search continues to show in the printable format window. Is there something different that I can do so that I can print the results of the most current search?
A: If you are using Microsoft Internet Explorer, please do the following:
- In Internet Explorer, go to the Tools/Internet Options menu
- On the General tab, in the Temporary Internet Files section, click "Delete Files"
- On the General tab, in the Temporary Internet Files section, click "Settings"
- If it is not already clicked, click the "Every visit to the page" radio button, then click "OK"