Market Data Multiples – Things to Consider in Business Valuation

January 14, 2019

By Shawn Hyde, International Society of Business Appraisers (ISBA) –

Business valuationI had a conversation with an SBDC consultant recently, about transaction databases and how to best utilize an analysis of that data when valuing a business. She suggested I share this information with her colleagues in the America’s SBDC network, so here it is.

There are several different databases, each maintained by different organizations, that track transactions of privately held businesses — the prices they sold for as well as various other financial metrics for each transaction. The idea behind these databases is that one could analyze transactions of similar businesses that have sold, in order to identify an indication of value for a business. But there is more to it than simply pulling up the data for the applicable SIC or NAICS code and calculating the average or median of the data provided.

The following is based on a couple of assumptions. First, that the data obtained from one of the databases consists of a sufficient number of datapoints to allow a detailed analysis, and second, that the purpose of the analysis is to determine fair market value (FMV). There are several other standards of value besides FMV, and those assignments may involve different analyses.  (more…)

Rules of Thumb and Business Valuation

December 3, 2018

By Shawn Hyde, International Society of Business Appraisers (ISBA) –

Take a look at your thumb. Now compare your thumb to another person’s thumb. There are differences in size, shape, manicure, strength, and flexibility between these two thumbs. Remember this comparison, as we will come back to it at the end of this article.

A Rule of Thumb is a brief measurement, typically based on a specific part of the operations of a business, such as revenues or some other easily calculated income stream, including Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The application of a rule of thumb includes some basic math, usually multiplying the selected source of income by a range of numbers.

Each industry, or type of business, usually has three or more different valuation rules of thumb that could potentially be applied to it. This means there are literally thousands of different rules of thumb that are available to provide indications of value for different types of businesses.  (more…)

What’s a Fair Price for a Privately Held Company?

October 22, 2018

By Shawn Hyde, International Society of Business Appraisers (ISBA) –

Publicly traded companies are valued every day on the stock market. But how do private business owners determine what a fair price is to buy out their partners? At what price they should sell their company? What’s the value of a 10% ownership interest in their company for gifting purposes?

The International Society of Business Appraisers (ISBA), www.intlBCA.com, exists to teach people how to answer these and other questions relating to the values of small businesses. Appraising privately held businesses involves logical thinking, financial analysis, and a healthy dose of practicality.

Some folks look at an enterprise’s balance sheet, find the equity section, and state that this is the value of the company. Not necessarily. If the company is going to be sold, are all the assets listed on the balance sheet going to transfer to the new owner? Also, the assets tracked on the financials are listed at cost less accumulated depreciation. If the equipment is fully depreciated, does that mean it has zero value? What about intangible assets like goodwill? This asset is typically not even listed on the balance sheet, and if it is, it only accounts for that portion that was purchased and not any goodwill that exists as part of the operation of the subject business.  (more…)