How Does Transaction Data Impact the Accuracy of Your Business Valuation?
Of the three approaches to value in a business valuation (Cost, Market, and Income), the Market Approach, which relies on comparable transaction data, can be a powerful source of accuracy, strength, and credibility to the value conclusion. Published transaction data is only as reliable as the source that provides it, so know the source.
Details, Details, Details….
- Small business transactions are usually categorized in 3 sizes; small (SDE / cash flow = $250K or less), medium (SDE / cash flow = $250K - $1MM), and large / middle market (EBITDA / cash flow = $1MM +). You’ll find that transaction publishers usually focus on one of those categories, so make sure you compare similar size transactions within the same industry.
- Real Estate and other non-operating assets should be excluded from every transaction, but not every publisher will remove those assets for you. Make sure you can identify every single component that makes up the sale price for each transaction.
- When comparing one company to another, consistency is important to making an “Apples to Apples” comparison. Make sure the Sales Price, Cash Flow, and other metrics are all reported and calculated using the same information.
The key consideration here is that the data source and the details that make up each transaction will put you in the best position to use quality market data in your analysis. Doing this will only improve the accuracy when calculating your value conclusion.
The Negatives of Reciprocal Relationships
There aren’t many options for market data, so you have to work with what’s available to you. Some publishers offer discounted or free access in return for transaction data they can publish. There is nothing wrong with reciprocal relationships, but you have to be careful because there is no way to verify the accuracy of the transaction details or, even worse, whether the transaction even took place.
Have Confidence in Your Transaction Data
Reliable data should come from unbiased sources. Generally, when researching small businesses data, it’s best to use information that comes from one source and uses the same reporting format for transaction metrics.
This is where PeerComps rises above the rest. With PeerComps transaction data, you can assure accuracy in determining the market value of a business because you get:
1. One Source Data – all transactions represent deals financed with an SBA Loan, so the details are supplied by the SBA 7(a) lender who financed the acquisition. This assures that every value metric is consistent from one transaction to the next, and you see exactly what was acquired by the borrower.
2. Results That Require No Calculations – Every transaction reflects Enterprise Value, has been reviewed to assure each value metric is reported in the same format, and all cash flow has been documented and supported. Non-operating assets are excluded, and all stock transactions have been recalculated to represent Enterprise Value. The results you get are the results you use - no adding or subtracting needed.
3. Consistency – No other database publisher has the most consistent data available than PeerComps. You can tell by the Coefficient of Variation (COV), which measures the dispersion of each transaction from top to bottom (around the Mean). PeerComps consistently averages .25 and below, and when you have more than 13,000 transactions available, you won’t find better data.
4. Credibility - Because PeerComps uses market transactions sourced by SBA Lenders, the data allows you to accurately present a market-based approach to value with a significantly high level of accuracy using what’s called the R-Squared Method. How does this translate to credible data? See this comparable method in action.
Want to learn more? The experts at GCF PeerComps are always here to answer your questions.