Having trouble finding a set of business sale comps to figure out what your company is worth? You are not alone. While the market approach to business valuation offers undeniable advantages when valuing a company, it suffers from one flaw – you need to have reliable, current, and transparent business sale comps.
Valuing public company stock is a piece of cake
If you take a look at the public stock market, pricing based on the market comparison is king. The price to earnings ratios are standard tender when valuing the shares of publicly traded stocks. The reason is that investors trade public company stock all the time, so you have plenty of up to the minute, reliable evidence of the company’s value. Market capitalization of public companies is a key measure of their value investors are interested in.
Private business selling prices are hard to come by
The big difference in the private business market is that such companies do not sell their ownership interests often. Private placements are limited to the so-called accredited investors (read: rich people who can afford to lose their money and not suffer hardship). A small business may go through its founding ownership life cycle without ever having to establish its valuation or take on outside investment.
Even if the private business sells, it does not mean the selling price and deal terms are made public. Private companies in the USA are not required to file reports on their M&A transactions with the government, unlike their public company counterparts.
Small wonder that over 90% of private business sales go unreported, the details of such deals kept as a closely guarded secret of the management, business brokers, or investment bankers.
The few deals that pop up are usually peddled by private data brokers who would sell anything to make a buck. The result, all too often, is poor quality data, lack of transparency, and little reporting consistency to make a reliable market comparison. Caveat emptor!
So what can you do when faced with lack of market data for a private business valuation? A couple of suggestions:
Consider using the guideline public companies
Quite often, small cap public companies offer an excellent comparison especially if your target business is managed in a professional manner. Data on public companies is high quality, readily available, usually free, and very consistent. To make your market comparison work, be sure to apply the discount for lack of marketability or DLOM.
The best part is you don’t have to pay anyone to get the data on public companies. Your tax dollars at work!
Consult business appraisers who value companies in your industry
Experienced business appraisers often do enough volume of work in certain industry sectors. As a result, they may be able to offer ideas as to what the typical valuation multiples are in your particular case.
Business brokers may help
If you are working on a business sale, seasoned business brokers in your neck of the woods may be an invaluable resource when pricing a business. Brokers who close successful deals often have the reliable “from the trenches” evidence of business selling prices. Remember though, that business brokers are very competitive and their knowledge of the market may be their closely guarded secret.