Business Valuation
Vicky-shema
2019dealstats-companion-guide.pdf
DealStats Companion Guide
CONTENTS ADVISORY BOARD 2
INTRODUCTION 3
DESCRIPTION OF THE DATA 4
DEALSTATS FEATURES 5 Sample Transaction Report 6 DATA SOURCES AND THE REVIEW PROCESS 8 Contributor Network 8 Securities and Exchange Commission 8 FIELDS AND DEFINITIONS 9 Source and Company Data 10 Income Statement Data 11 Balance Sheet Data 12 Purchase Price Allocation Data 13 Transaction and Other Data 14 Company Structure Data 15 Valuation Multiples 15 Financial Ratios 15 WHY USE TRANSACTION DATA? 16
FINDING COMPARABLE COMPANIES 17
SELECTING VALUATION MULTIPLES 23
APPLYING VALUATION MULTIPLES 29
USING DEALSTATS 34 Quick Search 34 Search 35 Display Grid 39 Display 41 Sort 44 Statistics 45 Insights 46 Summary 48 Multiples 49 Equity 50 Download 51 Recent, Save, and Reset 51 QUESTIONS? 53
DealStats. Market data. Evolved.
Welcome to the new generation of private and public company transaction comparables for valuation and M&A professionals DealStats (formerly Pratt's Stats) is a DealStats of the art platform that boasts the most complete financials on acquired companies in both the private and public sectors
Every transaction in DealStats is rigorously reviewed by BVR’s dedicated team of financial analysts in real time. Whether you are valuing a business, deriving a sale price, benchmarking performance or conducting fairness opinion research, you won’t find more complete and trustworthy comparable data in any other source
2 DealStats Companion Guide | bvresources.com/DealStats
ADVISORY BOARD Business Valuation Resources, LLC thanks the DealStats Advisory Board for its guidance and efforts to help improve BVR’s data collection and reporting processes
Pete Butler Valtrend LLC Eagle, ID
Bob Dohmeyer Dohmeyer Valuation Corp Dallas, TX
Nancy Fannon Marcum LLP Boston, MA
Fred Hall Amador Appraisals and Acquisitions Inc Jackson, CA
Toby Tatum Alliance Business Appraisal Reno, NV
Copyright © 2018 by Business Valuation Resources, LLC (BVR) All rights reserved Printed in the United States of America
No part of this publication may be reprinted, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher or authorization through payment of the appropriate per copy fee to the Publisher Requests for permission should be addressed to the Permissions Department, Business Valuation Resources, LLC, 111 SW Columbia St , Suite 750, Portland, OR 97201; (503) 479-8200; fax (503) 291-7955; permissions@bvresources com
Information contained in this book has been obtained by Business Valuation Resources from sources believed to be reliable However, neither Business Valuation Resources nor its authors guarantee the accuracy or completeness of any information published herein and neither Business Valuation Resources nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information This work is published with the understanding that Business Valuation Resources and its authors are supplying information but are not attempting to render business valuation, legal, or other professional services If such services are required, the assistance of an appropriate professional should be sought
3 DealStats Companion Guide | bvresources.com/DealStats
INTRODUCTION Business Valuation Resources, LLC (BVR) was founded in 1995 by Dr Shannon Pratt, CFA, ARM, ABAR, FASA, MCBA, CM&AA, who had the vision of creating the premier provider of data, news, and training to the business valuation profession Dr Pratt is known as one of the earliest and most prominent thought leaders in the area of private business valuations, particularly with regard to the valuation of minority interests Prior to BVR, Dr Pratt was a co-founder and managing director of Willamette Man- agement Associates He is the author of many seminal texts on private company valuation, including Valuing a Business: The Analysis of Closely Held Companies (now in its 5th edition), Cost of Capital: Ap- plications and Examples (also in its 5th edition), Standards of Value: Theory and Applications, Business Valuation Discounts and Premiums, and The Market Approach to Valuing Businesses, to name a few
After leaving valuation to pursue publishing full-time with BVR, Dr. Pratt first created the Business Valuation Update (BVU), a monthly newsletter that provides the appraisal profession with extensive coverage on all topics related to valuation, from methodology to case law After he launched BVU, Dr Pratt tapped into a unique need he identified during his long tenure in the valuation profession: There was a significant lack of private-company transaction data that contained enough data to allow for a thorough and sufficient comparison with an appraiser’s subject company. These data were something Dr Pratt wished were available when he was practicing business valuation, so he knew how important it would be to the profession This observation led to the birth of Pratt’s Stats.
BVR partnered with the International Business Brokers Association (IBBA) and its middle-market group, M&A Source Together, IBBA and M&A Source represent the largest organization of business intermediaries and M&A advisors in the world These business intermediaries and M&A advisors con- tributed details on private-business sales that occurred between two private parties—data that were not before available to the public Later, in May 1997, BVR launched the beta version of Pratt’s Stats.
In its original launch, Pratt’s Stats included a small number of transactions, available in print and disk formats, that spread across 34 Standard Industry Classification (SIC) codes. In October 1997, Pratt’s Stats version 1 was launched At the time, the database contained 150 transactions and promised quarterly updates. Z. Christopher Mercer, ASA, CFA (president of Mercer Capital), was the first reviewer of Pratt’s Stats. In his review, Mercer stated:
As all appraisers are aware, there is a relative void of good, cost-effective and easily accessible change of control transaction data for use with the guideline company method The release of Pratt’s Stats is a positive step toward providing a source for this information 1
In July 2018, Pratt’s Stats relaunched with new technology and was rebranded as DealStats The new technology allows users to select the fields they wish to see, filter and search on any field they choose, save their searches, and more The update also provides detailed purchase price allocation informa- tion, including useful lives for intangible assets DealStats also includes transactions of public com- panies (those transactions previously available in Public Stats)—a user has the option of searching for private companies, public companies, or both
1 Business Valuation Update, October 1997 Business Valuation Resources, LLC All rights reserved
4 DealStats Companion Guide | bvresources.com/DealStats
Since the original database launched in 1997, it has grown from 150 transactions reporting on 38 data points per transaction to a database that contains over 33,000 transactions2 and reports on 164 data points per transaction DealStats has evolved from a print and disk resource to a fully searchable and interactive online database covering transactions in more than 60 countries DealStats has expanded from reporting on transactions in 34 SIC codes to covering 831 SIC codes and 912 North American Industry Classification System (NAICS) codes. Further, DealStats has evolved from a beta version a few business appraisers tested to a database with subscribers on six continents from numerous pro- fessions
DESCRIPTION OF THE DATA DealStats collects information on transactions of private and public companies3 and seeks to cap- ture enough data for the user to make a comparison between the comparable transactions in the database and the user’s subject company. Additionally, DealStats collects data that provide insight into the transaction. The collected data include a business description and industry classification codes (both SIC and NAICS), financial statements (income statement/profit and loss statements and balance sheets), other non-income-statement measures of earnings (such as EBITDA and seller’s dis- cretionary earnings), purchase price allocations that detail which assets were acquired and which liabilities were assumed, and information pertaining to the transaction (including the selling price, structure of the consideration paid for the business, and information on employment agreements and noncompete agreements), among other things For examples of the data collected, see the Sample Reports available on the DealStats web page or on page 6 of this guide
DealStats uses the collected data to compute valuation multiples (also commonly referred to as trans- action multiples) for each transaction in the database The database provides up to six valuation mul- tiples for each transaction Valuation multiples represent a ratio of the company’s selling price divided by an earnings measure 4 For example, MVIC price/revenue is the selling price of the sold business divided by that business’s revenue If the company sold for $1 million and had yearly revenues of $2 million, the reported MVIC/revenue multiple would be 0.50 ($1 million/$2 million). These multiples are computed so they can be applied to the user’s subject company. For example, if the user’s subject company had annual revenues of $3 million, the user may estimate his or her subject company’s value is $1 5 million ($3 million × 0 50)
The database also computes financial ratios for each transaction. These computed values can help users further compare their subject company to the companies in the database. The ratios are orga- nized into the following categories: (1) profitability; (2) liquidity; (3) leverage; and (4) activity.
2 As of May 2018 3 Users can search by private companies, public companies, or both 4 With the exception of the MVIC/book value of invested capital multiple.
5 DealStats Companion Guide | bvresources.com/DealStats
DEALSTATS FEATURES DealStats is available to subscribers and day-pass buyers. The database is fully searchable by any field captured and reported in the database. As a user specifies criteria, the transactions that meet that criteria appear on the screen in a summary data grid Users can click on each transaction to open its detailed report, which provides data on all the fields that were reported in that transaction. Users can choose which fields to include in their summary data grid, as well as their sort order. From the sum- mary data grid, users can also select and deselect transactions, which will recalculate their summary statistics
After users finish specifying their search criteria and selecting/deselecting transactions, they are pre- sented with a page of statistics for the transactions that meet their specifications. The information includes a summary statistics data chart, which provides aggregate analysis for all the transactions in the user’s search Users can also view various types of graphs created from transactions that met their search criteria, including interquartile range graphs, scatter graphs, distribution graphs, and stacked bar charts. All of the data are exportable into Excel. Users can export just the fields from their data grid or all the fields for the transactions that met their search criteria. Users are also able to export the graphs and summary statistics that are available based on their selected transaction data You can view sample summary statistics and sample transaction reports on the DealStats web page or on page 6 of this guide The database also has a summary page that is formatted to be copied and pasted into your report There is also an option to save your search criteria and return to the results of that speci- fied criteria at a later date. The save option allows you to provide a name for the saved criteria and includes a section to specify any notes you may wish to document that pertain to that set of criteria
Subscribers to DealStats also have access to the DealStats Analyzer, an Excel-based tool that greatly improves their ability to determine their comparable set of companies, view scatter plots of their data, complete a detailed analysis, apply valuation multiples to their subject company, and export custom worksheets to a new Excel workbook Subscribers also receive a free subscription to the DealStats Private Deal Update, a quarterly analysis of private-company acquisitions by private buyers from the DealStats database You can view a sample copy of the DealStats Analyzer and an issue of the DealStats Private Deal Update on the DealStats web page
When members of BVR’s Contributor Network contribute information on business transactions to Deal- Stats, they can attach their name to the transaction or keep their information confidential. DealStats users can contact these contributors through BVR’s Find an Intermediary database These contribu- tors are a valuable source of information and can help provide additional insight into the transaction, industry, or geographical area
6 DealStats Companion Guide | bvresources.com/DealStats
DealStats Transaction Report
Prepared: 07/20/2018 02:02PM (PDT)
Target Details Source Data Transaction ID 42456-1 Name Zuf Acquisitions I LLC (d.b.a
AAdvantage Laundry Systems)
Target Type Private Acquirer Name EnviroStar, Inc.
Business Description Distributes Coin Laundry Washer and Dryer Equipment Filing Date 8-K 02/12/2018
Location Garland, TX, United States Target Region West South Central
Filing Date 8-K/A 02/13/2018
Age 52 Structure LLC Employee Count Other Filing Type
SIC NAICS Other Filing Date
5087 - Service Establishment Equipment and Supplies 423850 - Service Establishment Equipment and Supplies Merchant Wholesalers
Acquirer CIK 0000065312
Transaction Data Sale Initiation Sale Date 02/09/2018 Days To Sell
Percentage Acquired 100.0% Asking Price Transaction Type Asset
MVIC Price $20,849,000 Debt Assumed
$0 Amount Down $8,500,000
Income Balance Sheet Purchase Price Allocation Income Statement Type Latest Full Year Income
Date 09/30/2017 Date 09/30/2017 Tax Return/P&L Yes
Restated Income Date
06/30/2017
Net Sales $27,439,740 Cash and Equivalents $1,629,085 Cash and Equivalents $1,629,000
COGS $18,508,743 Accounts Receivable $3,356,126 Accounts Receivable $3,356,000
Gross Profit $8,930,997 Inventory $2,916,541 Inventory $2,917,000
Rent $228,000 Other Current Assets $479,791 Other Current Assets $475,000
Owner's Compensation Total Current Assets $8,381,543 Total Current Assets $8,377,000
Other Operating Expenses Fixed Assets $935,069 Fixed Assets $596,000
Depreciation and Amortization $211,501 Real Estate $0 Real Estate $0
Total Operating Expenses $7,364,532 Total Intangibles $0 Identifiable Intangibles
Operating Profit $1,566,465 Other Non-Current Assets $2,454,755 - Customer Related $4,594,000 10 Years
Interest Expense $128,809 Total Assets $11,771,367 - Backlog $0
Interest Income $0 Current Liabilities $4,913,496 - Developed Technology $0
Other Expenses $0 Long-Term Liabilities $281,797 - In-Process R&D $0
Other Income $33,449 Total Liabilities $5,195,293 - Trade Names/Marks $1,914,000 Indefinite
Earnings Before Taxes $1,471,105 Stockholders Equity $6,576,074 - Non-Compete $0
Tax Expense $0 - Other Intangibles $0
Tax Benefit $943,722 Total Ident Intangibles $6,508,000
Net Income $2,414,827 Goodwill $4,667,000
Total Intangibles $11,175,000
Other Non-Current Assets $2,455,000
Total Assets $22,603,000
Interest-Bearing Liabilities $0
Total Liabilities $1,754,000
© DealStats, a division of Business Valuation Resources Business Valuation Resources | 1-503-479-8200 | [email protected] | bvresources.com/dealstats
SAMPLE TRANSACTION REPORT
Continued on next page
7 DealStats Companion Guide | bvresources.com/DealStats
DealStats Transaction Report
Prepared: 07/20/2018 02:02PM (PDT)
Additional Transaction Information Deal Terms
Consideration: Cash payment of $8,500,000 and the issuance of 348,360 shares of the acquirer's unregistered common stock valued at $12,349,000.
Was there a Note in the consideration paid? Was there a personal guarantee on the Note? Amount Seller Financed $0
Was there a Noncompete Agreement? No Non-Compete Length (months)
Was there an Employment Agreement? Employment Agreement Value Lease Length (month)
Lease Terms
Total future minimum lease payments equal to $1,483,521.
Non-Compete Description
Employment/Consulting Agreement Description
Additional Notes
Zuf Acquisitions I LLC, doing business as AAdvantage Laundry Systems, distributes coin laundry washer and dryer equipment. The company was formerly known as Skyline Laundry Systems. The company was founded in 1965 and is based in Garland, Texas.
Purchase Price Allocation: Cash $1,629,000, Accounts Receivable $3,356,000, Inventory $2,917,000, Other current assets $475,000, Equipment and improvements $596,000, Trade Name $1,914,000 (indefinite useful life), Customer Relationships $4,594,000 (useful life of 10 years), Goodwill $4,667,000, Net investment in sales type leases, noncurrent $2,346,000, Other assets $109,000, Accounts payable and accrued expenses ($1,419,000), Customer deposits ($335,000), for a total purchase price of $20,849,000.
Buyer's Motivation: Henry M. Nahmad, EVI’s Chairman and Chief Executive Officer, commented: “AAdvantage represents EVI’s first investment in the southcentral region of the United States. This investment is consistent with our plan to build North America’s largest commercial laundry distributor delivering a comprehensive product offering, world-class installation and maintenance services, and advanced technologies that deliver on our pursuit of growth. We welcome all 51 members of the AAdvantage team and are excited to work together in the years ahead.”
Valuation Multiples Profitability Ratios Leverage Ratios MVIC/ Sales 0.76x Net Profit Margin 9.0% Fixed Charge Coverage 12.16
MVIC/ Gross Profit 2.33x Operating Profit Margin 6.0% Long-Term Liabilities to Assets 2.0%
MVIC/ EBITDA 11.7x Gross Profit Margin 33.0% Long-Term Liabilities to Equity 4.0%
MVIC/ EBIT 13.3x EBITDA Margin 6.0%
MVIC/ SDE SDE Margin
MVIC/ Book Value Invested Capital 3.0x Return on Assets 21.0%
Return on Equity 37.0%
Earnings Liquidity Ratios Activity Ratios EBITDA $1,777,966 Current Ratio 1.71 Total Asset Turnover 2.33
Seller's Discretionary Earnings Quick Ratio 1.11 Fixed Asset Turnover 29.35
Gross Cash Flow $2,626,328 Inventory Turnover 9.41
DealStats is the leading source for complete private company and public company transaction data. Business intermediaries who are members of the Business Valuation Resources (BVR) Contributor Network contribute fully vetted deals to DealStats — deals available only through BVR. DealStats returns details on the income statement, balance sheet, purchase price allocation, deal terms, financial rations, selling price multiples and more.
8 DealStats Companion Guide | bvresources.com/DealStats
DATA SOURCES AND THE REVIEW PROCESS
CONTRIBUTOR NETWORK To build the DealStats database, BVR has created a network of business intermediaries called the Con- tributor Network A business intermediary is a professional that connects business buyers and sell- ers and helps facilitate the business transaction between the parties involved Many members of the Contributor Network are credentialed and hold a Certified Business Intermediary (CBI) certification, Merger & Acquisition Master Intermediary (M&AMI) certification, or Certified Merger & Acquisition Advisor (CM&AA) certification.
The Contributor Network was created so that business intermediaries can contribute their closed deal information to BVR and receive access to pooled data in an easily searchable online format While the Contributor Network is primarily comprised of individual intermediary offices, BVR also partners with various business broker associations and corporate franchise headquarters These partnerships have enabled DealStats to incorporate closed deal transaction information from around the United States and Canada
After receiving closed deal information from a business intermediary, a BVR analyst reviews the data to ensure that the information is logical, mathematically correct, and complies with the DealStats data reporting conventions (such as removing the value of purchased real estate from the selling price For more on DealStats reporting conventions, visit the DealStats FAQ page) During the review process, if the analyst finds anything that looks incorrect, ambiguous, or needs further explanation, the analyst will contact the intermediary with questions After all questions are answered and the initial review process is complete, a second BVR analyst reviews the deal information to ensure that everything is accurate By having more than one analyst review the data before incorporating them into the data- base, BVR is able to ensure a superior level of quality in the DealStats database
Members of the Contributor Network are able to include their name and firm name on the transaction data they contribute If a user of DealStats has a question about a business transaction, he or she can contact the intermediary using the Find an Intermediary database The business intermediary may be able to help should the user have more detailed questions about the transaction If the business intermediary’s name and firm name do not appear on the transaction, then the broker elected to keep its information confidential when contributing the transaction data.
If you are a business intermediary and would like to contribute information on business sales to Deal- Stats, visit our Contributor Network web page to learn more, discover the benefits, and join.
SECURITIES AND EXCHANGE COMMISSION The second source from which BVR’s analysts collect transactional information is the Securities and Exchange Commission (SEC), utilizing the Electronic Data Gathering, Analysis, and Retrieval (ED- GAR) system public-company filings portal. Through EDGAR, BVR analysts research mergers and
9 DealStats Companion Guide | bvresources.com/DealStats
acquisitions of private companies that publicly traded companies have executed and reported Pub- lic companies report their merger and acquisition (M&A) activity through their published 8-K filings, also known as Current Reports An 8-K is a broad form that covers events considered important to a company’s shareholders Among other items, the form may include information on new management, potential bankruptcy, the departure of a CEO, and any M&A activity. BVR analysts review all 8-Ks filed within a given year and identify and catalogue the forms that contain M&A information After identi- fying the 8-K filings that contain M&A activity, BVR analysts conduct further research to determine whether sufficient information exists in order to include the transaction data in DealStats If the re- quired information is present, the transaction data are compiled into a DealStats transaction report
BVR analysts include the SEC filings used to document the transaction sourced from the SEC site. This includes the date of the 8-K used, the date of the 8-K/A used, and the filing type and date of any other filings used (such as a 10-K or 10-Q). Also, if the transaction was sourced from the SEC, the da- tabase also includes a link to the acquiring company’s filing page. Accessing this link allows a user to easily find the documents BVR analysts used when capturing the transaction data. Reviewing these source documents may provide additional transaction details not available in the DealStats database
After a BVR analyst documents a transaction from the SEC, the analyst reviews and revises his or her work before sending it to a second analyst for further review and revision After a thorough review, the second analyst then sends the transaction to a third analyst for a final review. During this review and revision process, misreported information is corrected and unreported information is identified. The first analyst then makes the corrections and updates necessary for the transaction to be approved and added to the database
To cut costs, many database companies have implemented data crawlers to scour the SEC and web and pull down information, with little to no analyst review and revision While these companies save money by eliminating the need for analysts, they forgo the many quality control procedures that human analysts provide The continuous review and feedback between BVR’s analysts during the research and data documentation process ensures that information is reported accurately and consistently
FIELDS AND DEFINITIONS DealStats reports up to 164 data fields per transaction. DealStats seeks to report on a significant num- ber of fields so a user has the ability to make a comparison between the transactions in the database and the user’s subject company in order to identify a set of comparable transactions. The following lists the field names and definitions included in the database. This list is available on the DealStats FAQ page, along with other useful information DealStats seeks to add transactions that users deem significant whenever possible. We encourage you to contact us with any suggestions or feedback you have at customerservice@bvresources com
10 DealStats Companion Guide | bvresources.com/DealStats
SOURCE AND COMPANY DATA Term Definition
Contributor Name/Firm The name of the business broker or business intermediary that was involved with the sale of the business, as well as its company name. This intermediary provided the sale details to DealStats.
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.
Target Type Denotes whether the target was a private company or individual or whether the acquirer was a public company.
Target Business Description The description of the acquired business.
Franchise A yes-no field specifying whether the acquired company was a franchise or independent.
Development Stage Company
A yes-no field specifying whether the acquired company was focused on early-stage business activities, such as research and development. Companies marked as “yes” generally have no or little revenue.
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 which 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 www.osha.gov/pls/imis/sicsearch.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 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.
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: • East North Central (IL, IN, MI, OH, WI); • East South Central (AL, KY, MS, TN); • Mid-Atlantic (NJ, NY, PA); • Mountain (AZ, CO, ID, MT, NM, NV, UT, WY); • New England (CT, MA, ME, NH, RI, VT); • Pacific (AK, CA, HI, OR, WA); • South Atlantic (DC, DE, FL, GA, MD, NC, SC, VA, WV); • West North Central (IA, KS, MN, MO, ND, NE, SD); and • West South Central (AR, LA, OK, TX).
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.
11 DealStats Companion Guide | bvresources.com/DealStats
INCOME STATEMENT DATA Term Definition
Data Are “Latest Full Year” Reported Indicates that the income data reflect the latest reported full-year financial statement.
Data Are Restated
Indicates that, for broker submitted transactions (see “Source Data” section on detailed transaction report to determine whether the transaction was submitted by a broker or retrieved from SEC filings), the income data have 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 DealStats “Notes” field may contain further details pertaining to the restatements.
Income Statement Date Date of the last filed income statement.
Income Statement Type
This value describes the type of income data the business buyer had access to, and/or the type of income data the business seller provided to the buyer, during the business transaction negotiation. The available income statement types are Tax Return/P&L, Owner to Prove, and Owner Estimate. The Tax Return/P&L type (accounting for 98.4% of all types as of August 2018) means that the buyer and seller had access to tax returns and/or profit and loss statements. The Owner to Prove generally applies to businesses where the owner had a lot of unreported cash sales, and the owner planned on proving the sales to the buyer to justify the business’s selling price (instead of providing a tax return, which would show lower earnings). The Owner Estimate type generally applies to income statements where the owner did not keep detailed records and, as a result, estimated his or her sales and expenses to the best of his or her ability.
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 Expenses 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 that value in the “Tax Benefit” field.)
Tax Benefit Annual value of tax benefit.
Net Income Earnings Before Taxes - Tax Expense + Tax Benefit
EBITDA Operating Profit + Depreciation/Amortization
Discretionary Earnings Operating Profit + Depreciation/Amortization + Owner’s Compensation
Gross Cash Flow Net Income + Depreciation/Amortization
12 DealStats Companion Guide | bvresources.com/DealStats
BALANCE SHEET DATA Term Definition
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 that 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
Equipment and leasehold improvements, net of accumulated depreciation. DealStats does not include the value of buildings and real estate in the “Fixed Assets” field (this value is captured in the “Real Estate” field). Some of the larger transactions that are captured from the Securities and Exchange Commission website may not provide information that separates the value of buildings and real estate from fixed assets, and in these instances DealStats is unable to determine and separate their values.
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 noncurrent 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 Non-Current 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
13 DealStats Companion Guide | bvresources.com/DealStats
PURCHASE PRICE ALLOCATION DATA Term Definition
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 that 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 equipment and leasehold improvements acquired, net of accumulated depreciation. Some of the larger transactions that are captured from the SEC website may not provide information that separates the value of buildings and real estate from the acquired fixed assets, and in these instances DealStats is unable to determine and separate their values.
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 list 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 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 noncurrent assets acquired not already identified and included in the preceding purchase price allocation fields.
Total Assets PPA The value of 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 the buyer assumed.
Useful Life Fields When available, the useful lives will be populated for the identifiable intangible assets. An intangible asset with a finite useful life is amortized, and its life will be provided in years (e.g., 6.5). An intangible asset with an indefinite useful life is not amortized and will be labeled as “Indefinite.”
14 DealStats Companion Guide | bvresources.com/DealStats
TRANSACTION AND OTHER DATA Term Definition
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 The price the seller desired at time of listing the business for sale.
MVIC (Market Value of Invested Capital)
Also known as the selling price, 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 the buyer assumed. The MVIC price includes the noncompete value and the assumption of interest-bearing liabilities and excludes: (1) the real estate value; (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, noncurrent 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 whether a purchase price allocation is presented there. If no purchase price allocation is available for the transactions, the appraiser will need to use his or her experience and knowledge in the field and the buyer’s/seller’s knowledge and experience with his or 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.
Transaction Costs
This applies to deals documented from the SEC, not those contributed by members of BVR’s Contributor Network. Transaction Costs are the reported amount of costs the acquiring company incurred with the acquisition. The amount reported typically includes the cost of advisory fees, legal fees, accounting fees, and other costs that were directly associated with the acquisition.
Employment/Consulting Agreement Description The description of the seller’s agreement to provide services or training to the acquirer or acquiring company.
Amount Seller Financed The value of the seller financing, if any. Often referred to as a “promissory note” or “seller note,” this is the amount the buyer will need to pay the seller over time. The terms of seller financing, when available, will be included in the “Deal Terms” field.
Deal Terms The detailed consideration information that specifies what, and how, the buyer paid the seller for the equity or assets of the business.
Transaction Type Specifies whether the acquirer purchased the stock or assets of the business.
Noncompete Agreement Value
Dollar value placed on an agreement with the selling party not to compete with the purchaser, usually for a certain period 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.
Live Date
The date the transaction was entered into DealStats internal data management system. For broker contributed deals, this represents the date the broker contributed the deal information to DealStats. For internally documented deals BVR captures from the Securities and Exchange Commission, it represents the date a BVR analyst documented the transaction.
15 DealStats Companion Guide | bvresources.com/DealStats
COMPANY STRUCTURE DATA Term Definition
C Corporation A corporation acting as a separate taxpaying entity for income tax purposes. The profit of a C corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends.
S Corporation A corporation with restrictions on equity ownership. S corporations pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
Partnership A business comprised of two partners, either created as a general partnership or limited partnership. A partnership files an annual information return to report the income, deductions, gains, losses, etc. to the IRS, but it does not pay income tax. Instead, it passes through any profits or losses to its partners.
Sole Proprietorship
A sole proprietor is someone who owns an unincorporated business by himself or herself. The business pays no income taxes. The sole proprietor pays personal income tax on the profits generated. A sole proprietor reports all business income or losses on his or her personal income tax return.
LLC A Limited Liability Company (LLC) is a structure where the members have limited legal liability and may participate in the management of the organization. A single-member LLC is taxed as a sole proprietorship or corporation. An LLC that has more than one member pays income tax as a partnership or as a corporation.
VALUATION MULTIPLES 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/SDE MVIC/(Operating Profit + Owner’s Compensation + Depreciation/Amortization)
MVIC/Book Value of Invested Capital MVIC/[(Total Assets - Total Liabilities) + Long-Term Liabilities]
FINANCIAL RATIOS 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
EBITDA Margin EBITDA/Net Sales
SDE Margin Discretionary Earnings/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)
16 DealStats Companion Guide | bvresources.com/DealStats
WHY USE TRANSACTION DATA? As Heidi Walker aptly stated, “Investors absolutely use it, academic research supports it, and the courts require it ”5 A key principal in valuation is substitution—what alternatives are available to the buyer and seller Transaction data represent real transactions, allowing users to value companies based on prices of actual businesses that have sold in the market As of May 2018, DealStats captures a wealth of transaction data, comprised of up to 164 data fields for over 33,000 transactions.
Transaction data can be used to create valuation multiples that can be applied to a subject company. These valuation multiples, and their application, are easy to understand and can clearly be explained to clients, attorneys, juries, or whoever your target audience is. Courts have general recognized three standard methodologies in business valuation, one of which is the comparable transaction analysis 6 Further, it has been said that “[t]ransactional data can provide one of the strongest indications of value in the appraisal of a company if the method is applied with diligence and care ”7
Different methods exist to estimate the required return for private companies, including:
1 From public markets using the capital asset pricing model (CAPM);
2 From public markets using the buildup method (BUM);
3 From industry-specific public markets using the guideline public company method (the rate of return is expressed as a multiple); and
4 From private transaction databases (the rate of return is expressed as a multiple)
While all four methods have their own strengths and should be considered by the practitioner, when comparing the methods, Heidi Walker finds that using the private transaction databases require fewer subsequent adjustments, as size and industry factors are included within the resultant multiple from the practitioner’s comparable companies group 8
5 Heidi Walker, The Comprehensive Guide to the Use and Application of the Transaction Databases, 3rd edition, 2015, Business Valuation Resources, pg 9
6 Ibid 7 Heidi Walker and Nancy Fannon, “Understanding the Transaction Databases: Excerpt From New Guide,” Business Valuation
Update, May 2008 8 Heidi Walker, The Comprehensive Guide to the Use and Application of the Transaction Databases, 3rd edition, 2015, Business
Valuation Resources, pg 8
Exhibit 1. Adjustments Typically Required From Rate of Return Proxy
Adjustment Rate of Return BUM Rate of Return CAPM Guideline Public
Company Private Transaction
Database
Specific company Yes Yes Yes Yes
Growth Yes Yes Yes Yes
Size Yes Yes Yes No
Industry Yes No No No
17 DealStats Companion Guide | bvresources.com/DealStats
Using data from private transaction databases works in tandem with other methods The Delaware Court of Chancery has said:
Although there is no single preferred or accepted valuation methodology under Delaware law that establishes beyond question a company’s value, there are commonly accepted methodologies that a prudent expert should use in coordination with one another to demonstrate the reliability of its valuation. If a discounted cash flow [DCF] analysis reveals a valuation similar to a comparable companies or comparable transactions analysis, I have more confidence that both analyses are accurately valuing a company 9
FINDING COMPARABLE COMPANIES DealStats is searchable by a variety of criteria that a user may deem relevant when searching for com- parable companies in order to observe transaction multiples It is important that the user seeks to utilize transaction multiples derived from companies that are similar to the subject company. It should be noted that the goal in determining comparable companies should not be to find a “perfect match”— all companies are unique, so finding an identical match is not possible. Instead, the user should focus on identifying comparable companies that have similar characteristics to the subject company. These characteristics include the relevant financial and operational aspects that the user has deemed impor- tant in his or her identification of comparable companies.
The comparability or “likeness” of other companies to the user’s subject company is important, yet subjective, and what is considered comparable can vary from practitioner to practitioner. Regardless, industry, size, profitability, and transaction date are generally factors that practitioners consider when selecting comparable companies While one often seeks enough transactions to have a meaningful sample, sometimes even relatively few transactions can be instructive Dr Shannon Pratt writes, “As a generality, the more data we have per transaction (to select those comparable to our subject) and the more reliable the data, the fewer transactions we need to have a meaningful sample ”10
Each company in DealStats is given at least one Standard Industry Classification (SIC) code and one North American Industry Classification System (NAICS) code Companies that engage in more than one line of business or provide more than one type of product or service can be given up to two ad- ditional SIC and NAICS codes, for a total of up to three SIC and NAICS codes per company Users can search by the primary SIC or NAICS code or by any SIC or NAICS code assigned to the company
Searching by any SIC or NAICS code assigned to the company may yield more results and may be a good method to identify a larger pool or comparable companies While commonly used, SIC codes were last updated in 1987 NAICS codes, on the other hand, were adopted in 1997 and are updated every five years. The NAICS codes were most recently revised in 2017. DealStats updates the NAICS codes assigned to all companies in the database every five years when each new revision is made.
9 In re Hanover Direct, Inc. Shareholder’s Litigation, Delaware Court of Chancery, Sept 24, 2010 10 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 40
18 DealStats Companion Guide | bvresources.com/DealStats
A user may find that some industries have a lot of acquisition activity, while others do not. Ultimately, if some data are available, it may be important to give it credence Dr Shannon Pratt writes, “Even one good transaction generally is better than nothing, if it is a reasonably good guideline transaction and the data are complete and reliable ”11
The industry in which the analyst’s subject company operates is often considered important as the median multiples and dispersion of those multiples can vary among industries Consider Exhibit 3, which displays the interquartile range for EBITDA multiples in DealStats by NAICS sector 12 Both the median EBITDA multiple and spread between the 25th and 75th percentiles vary by industry Some industries appear to have high EBITDA multiples relative to other industries and a larger interquartile range (such as the information sector, which contains technology companies), while other industries have lower relative median multiples and a smaller interquartile range (such as the accommodation and food service sector) Also consider that, for the same industry, the interquartile range can vary among multiples. For example, the interquartile range for MVIC/EBITDA is comparatively large for the healthcare and social assistance sector, yet the sector has a relatively less dispersed interquartile range for its MVIC/Net Sales multiple.
11 Shannon Pratt and Alina Niculita, Valuing a Business, 5th edition, New York, McGraw-Hill, 2008, p 312 12 The interquartile range describes the middle 50% of observations The top of the grey rectangle indicates the 75th percen-
tile; the bottom of the blue rectangle indicates the 25th percentile The line where the two rectangles meet represents the median If the interquartile range is large, it means that the middle 50% of observations are spaced wide apart, and, if the interquartile range is narrow, it means the middle 50% of observations are spaced close together
Exhibit 2. Distribution of Transactions in DealStats by Major Industry Exhibit 2. Distribution of Transactions by Major Industry
Agriculture, Forestry, & Fishing (2.6%) Mining (1.2%) Construction (3.7%) Manufacturing (18.0%) Transportation, Communications, Electric, Gas & Sanitary (5.3%) Wholesale Trade (5.4%) Retail Trade (23.9%) Finance, Insurance, & Real Estate (6.1%) Services (33.8%)
19 DealStats Companion Guide | bvresources.com/DealStats
It has generally been observed that higher multiples are paid for larger companies when compared with smaller companies 13 DealStats contains transactions across a range of sizes BVR’s website pub- lishes a table that captures the current transactions counts in the database by transaction size Users searching the database will find transactions that are considered “Main Street” or small in nature, transactions of middle-market companies, and transactions of large companies In determining size, a user can select from a variety of fields, including “Net Sales (Revenues),” “MVIC Price” (the business sale price), “Total Assets” (the book value of the company’s assets), among other fields.
13 Pratt’s Stats Private Deal Update – 4Q 2017, Business Valuation Resources, LLC ©2018 All rights reserved
Exhibit 4. MVIC/Net Sales Interquartile Range by NAICS Sector
Agriculture,
Forestry, Fishing
Construction
Manufacturing
WholesaleTrade
Retail Trade
Transportation,
Warehousing
Information
Finance, Insurance
Real Estate,
Rental, Leasing
Professional, Scientific,
Technical Services
Admin. and Support,
Waste Mgmt., Remediation Svcs.
Educational Services
Social Assistance
Arts, Entertainment
Recreation
Accommodation
and Food Service
OtherServicesand Hunting
0.0
1.0
2.0
3.0
4.0
5.0
6.0
M ul
tip le
Exhibit 3. MVIC/EBITDA Interquartile Range by NAICS Sector
Agriculture,
Forestry, Fishing
Construction
Manufacturing
WholesaleTrade
Retail Trade
Transportation,
Warehousing
Information
Finance, Insurance
Real Estate,
Rental, Leasing
Professional, Scientific,
Technical Services
Admin. and Support,
Waste Mgmt., Remediation Svcs.
Educational Services
Healthcare,
Social Assistance
Arts, Entertainment
Recreation
Accommodation
and Food Service
OtherServicesand Hunting
0.0
5.0
10.0
15.0
20.0
25.0
M ul
tip le
20 DealStats Companion Guide | bvresources.com/DealStats
A user may also wish to consider profit- ability when searching for and select- ing comparable companies A user can consider companies that have achieved a positive or negative level of earnings, such as operating profit, net income, EBITDA, or seller’s discretionary earnings (e g , identifying companies with positive operating revenue to facilitate a compari- son to a subject company with positive operating profit). A user may also consid- er margins, including gross profit margin, operating profit margin, net profit margin, EBITDA margin, and seller’s discretionary earnings margin
The date at which the transaction oc- curred is typically another factor a user considers The user should determine how far back in time to go when select- ing comparable companies It has been observed that private-company transac- tion multiples tend to be less volatile over time than multiples in daily public-market trading 14 An overall general consistency in multiples has been observed in DealStats, such as in the median MVIC price/net sales multiple, which has been between 0.45 and 0.49 each year for the past 15 years when reviewing transactions of private companies by private buyers 15
Raymond Miles, the founder and past director of the IBA, has done extensive research into transac- tions over extended periods and demonstrated that the date of the transaction does not affect most industries The conclusion reached was that the multiples do not appear to be time-sensitive, since inflation affects not only the sales prices, but also the gross and net earnings of the business. In dis- cussing Miles’ research, Gary Truman notes:
Empirical data for all business categories, in aggregate, does not show any significant change in business value as a function for time This is contrary to the conventional wisdom that only recent sales should be considered when choosing guideline (comparable) companies 16
Jack Sanders, an M&A specialist, appraiser, and author, has also determined that selling price ratios remain consistent over time In comparing private-company transaction data within the last 10 years to transaction data greater than 10 years old, he has found that there is very little difference in the
14 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 41 15 Pratt’s Stats Private Deal Update – 4Q 2017, Business Valuation Resources, LLC ©2018 All rights reserved 16 Gary Trugman, Understanding Business Valuation, 5th edition, 2017, pg 398, AICPA
Exhibit 5. Number of Private and Public Companies in DealStats by Sale Price
DealStats
Sale Price Private
Companies Public
Companies
$250,000 and Under 12,439 0
$250,001-$500,000 4,190 0
$500,001-$1 million 2,770 4
$1,000,001-$2 million 1,698 9
$2,000,001-$5 million 1,718 76
$5,000,001-$10 million 1,258 107
$10,000,001-$20 million 1,281 219
$20,000,001-$50 million 1,536 490
$50,000,001-$100 million 925 507
$100,000,001- $500 million 1,081 1,258
Over $500,000,001 420 1,314
Total 29,316 3,984
Notes: As of May 18, 2018.
21 DealStats Companion Guide | bvresources.com/DealStats
selling price ratios, specifically with regard to the multiple of sales and the multiple of discretionary earnings 17
Still, the overall general stability in multiples over time may mask differences in multiples for interim periods over the long term for certain industries Therefore, it is recommended that a user review transaction multiples and industry-related factors over an extended period It may become clear that the transaction multiples are consistent across periods, such as for restaurants, or that some indus- tries became hot acquisition targets during certain periods, such as what occurred during the dot-com bubble in the late 1990s
Should your results not yield enough observations for your analysis, you may need to open your search parameters to be more inclusive, such as by expanding your size criteria or your industry criteria
17 Jack Sanders, “BIZCOMPS User Guide,” available at www.bvresources.com/products/faqs/bizcomps
Exhibit 6. Median MVIC Price/Net Sales and Median MVIC Price/SDE by Year
Median MVIC Price/Revenue
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.45 0.48 0.47 0.49 0.49 0.46 0.45 0.45 0.47 0.46 0.46 0.47 0.45 0.48 0.48
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Median MVIC Price/Revenue Transactions of private companies made by private buyers
Median MVIC Price/SDE
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2.6 2.7 2.8 2.8 2.6 2.2 2.0 1.9 1.9 2.1 2.2 2.2 2.3 2.4 2.7
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Median MVIC Price/SDE Transactions of private companies made by private buyers
22 DealStats Companion Guide | bvresources.com/DealStats
Gilbert Matthews has stated:
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 18
Dr. Shannon Pratt writes:
The court accepted the guideline companies for all three experts in the Estate of Gallo19 (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.20… 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, McDonald’s, Anheuser-Busch, IBM and Coca-Cola
There is no consensus among practitioners as to the appropriate number of comparable companies one needs when employing the guideline transaction method Dr Pratt has said that one needs only a couple good comparable companies (and potentially even one can be useful if it were deemed very comparable). Others prefer a larger sample, such as between five and 20 (depending on the degree of precision required), to obtain more confident measures of central tendency (such as the mean and median) or to segment the data into percentiles Still, others utilize all transactions for which market data are available for a general type of business (e g , all restaurant transactions)
Recently, Toby Tatum presented a webinar with BVR and described what he referred to as “Tatum’s Law of Market Multiples,” in which he advocates for appraisers to use at least 30 transactions in their set of comparable companies 21 Two listeners, Ronald Rudich and Howard Lewis, took issue with this number and wrote an article, “Counterpoint to Tatum’s Law of Market Multiples ”22 In their article, they state that Tatum’s recommendation of 30 transactions is “contrary to what Ray Miles (the founder of The Institute of Business Appraisers) wrote in his treatise on the ‘Direct Market Data Method; the Technical Studies on the IBA Transactional Database,’” which puts the minimum number at five trans- actions
18 Gilbert Matthews, Fairness Opinions webinar, April 2, 2001, Business Valuation Resources 19 Gallo v. Commissioner, T C Memo 1985-363, 50 T C M (CCH) 470, T C M (RIA) 85363 (July 22, 1985) 20 Hall v. Commissioner, 92 T C 312 (Feb 14, 1989) 21 Toby Tatum, Valuing a Business With BIZCOMPS: Considerations, Tips and Advanced Methods webinar, Aug 1, 2017,
Business Valuation Resources 22 “Valuation Experts Clash Over Analysis of Transactional Data,” Business Valuation Update, April 2018
23 DealStats Companion Guide | bvresources.com/DealStats
Further noted is that Toby’s original webinar discussed BIZCOMPS transactions, which include 21 data points per transaction, whereas DealStats includes up to 164 data points per transaction In The Comprehensive Guide to the Use and Application of Transaction Databases, Nancy Fannon and Heidi Walker write:
The Transaction Method is included within the market approach to business valuation.… This method may also be referred to as the Guideline Merged and Acquired Company Method, the Direct Market Data Method, the Guide Line Transaction Method.… BIZCOMPS is often most appropriately used under the “total market theory ”
In terms of their usefulness in a particular valuation assignment, some databases are more appro- priately used on a “transaction-by-transaction” basis because they provide a great deal of informa- tion on each transaction while others are more useful under the “total market theory” because they provide a large number of transactions but limited information on each Both can be useful tools in a valuation analysis
Pratt’s Stats [DealStats] covers both small and large deals and can often be used in either context [“transaction-by-transaction” base and “total market theory”] 23
In response to Tatum’s webinar, and Rudich and Lewis’ response, Gary Trugman wrote a “Letter to the Editor” in the Business Valuation Update Trugman urges appraisers to run statistics on the data to see how widely dispersed the multiples are. Trugman writes that “[u]sing five transactions makes no sense in most of the databases, but blindly being content with 30 transactions may be almost as bad The appraiser really needs to analyze the data ”24
SELECTING VALUATION MULTIPLES DealStats provides up to six valuation multiples per transaction. These multiples include:
1 MVIC/Net Sales;
2 MVIC/Gross Profit;
3 MVIC/EBITDA;
4 MVIC/EBIT;
5 MVIC/SDE; and
6 MVIC/Book Value of Invested Capital.
DealStats reports MVIC prices and MVIC multiples Therefore, the application of the multiples results in an invested capital value DealStats does not report equity prices Applying equity multiples assumes
23 Nancy Fannon, and Heidi Walker, The Comprehensive Guide to the Use and Application of the Transaction Databases, 2nd edi- tion, 2010, pg 17-18, Business Valuation Resources
24 Gary Trugman, “Letter to the Editor: Comments on an Article on the Use of Statistics in the Transaction Method,” Business Valuation Update, May 2018
24 DealStats Companion Guide | bvresources.com/DealStats
the same capital structure and proportion of debt between the subject company and the comparable company or companies Often this is not the case It is advisable to apply an MVIC multiple to the sub- ject company and then subtract the subject’s interest-bearing liabilities (as well as making any other necessary adjustments for liabilities and assets) to arrive at the subject’s equity value.
The reported MVIC prices in DealStats represent invested capital prices, even when debt is not as- sumed (such as when the seller retains it) An analyst does not need to add the acquired company’s balance sheet debt to the reported MVIC price when debt is not assumed Nancy Fannon states, “In or- der to be an invested capital price, it need not be ‘plus debt ’ The important thing is that it is not net of debt ” She goes 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 DealStats ”25
Adding unassumed debt to the MVIC price can overstate MVIC, and any multiples derived from it An example is if Company X buys Company Y for $20 million in cash Company Y has $10 million in debt on its 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 its debt of $10 million The MVIC price for this acqui- sition is $20 million, not $30 million Adding the unassumed debt of $10 million would overstate the price paid for the assets of the company and cause an overinflated MVIC price. The MVIC price only includes those interest-bearing liabilities that are assumed, not those the seller retained
When determining which multiples to use, the analyst may wish to consider the size of the company Dr. Pratt observes that, for very small companies—particularly service companies—price/sales [MVIC/ Net Sales] “gets the primary weight ”26 The reason being that many buyers believe they already know how much they can bring down to the bottom line Gary Trugman echoes these thoughts, stating that the multiple is appropriate for smaller businesses, particularly cash businesses 27 Trugman also notes that service businesses and those light in tangible assets are “considered to be candidates for the ap- plication of an MVIC/Sales multiple.”28
The next most commonly used multiple that Dr Pratt cites for small businesses with one owner is a multiple of discretionary earnings (MVIC/SDE) because, for many very small businesses, any income number beyond that may be negative or too small to have any meaning
Dr. Pratt finds that, as company size begins to increase, seller’s discretionary earnings tend to become meaningless 29 Dr Pratt says, “[M]ost analysts would not use it for companies valued over $5 million ” Seller’s discretionary earnings are a measure of earnings to an owner-operator of a business It is essentially EBITDA plus the compensation to one owner (the earnings before the owner is compen- sated), so, to the extent more than one owner exists, the measure becomes less meaningful
As company size increases, many analysts tend to consider EBITDA [MVIC/EBITDA] and EBIT [MVIC/ EBIT] multiples, though there is a tendency to prefer EBITDA multiples because they eliminate the
25 Nancy Fannon, Transaction Databases webinar, Oct 23, 2008, Business Valuation Resources 26 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 138 27 Gary Trugman, Understanding Business Valuation, 5th edition, 2017, AICPA, pg 359 28 Ibid 29 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey: Wiley & Sons, 2005, p. 138.
25 DealStats Companion Guide | bvresources.com/DealStats
effects of different policies with respect to accounting for noncash charges (depreciation and amor- tization) Alternatively, EBIT multiples may be available when EBITDA multiples are not, as a result of depreciation and amortization information not being available or not being reported
Franz Ross, a practitioner and author who has done extensive research on the DealStats database, has concluded that gross profit is the most reliable fundamental variable determining MVIC, followed closely by discretionary earnings (Note: Discretionary earnings was a much more significant variable for companies with sales under $5 million than for companies with sales greater than $5 million) 30 Ross’ work analyzed companies with sales between $1 million and $30 million in the DealStats database and segmented the data out by various industries: construction, manufacturing, printing/publishing, wholesale trade, and retail trade (service companies were not analyzed as many do not show a cost of goods sold figure). His research showed a consistently high correlation for gross profits across each industry While DealStats reported gross profit as a figure in the database at the time, the MVIC/Gross Profit multiple was not calculated and provided to the user. Ross’ research led to the creation of the MVIC/Gross Profit multiple in the database.31
DealStats provides the coefficient of variation (CV) for each multiple in a user’s group of comparable companies The CV is computed as the standard deviation divided by the mean and is a statistic used to measure dispersion The belief is that the valuation multiples with the lowest CVs 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 CVs Also, multiples that display large CVs may alert the analyst to potential outliers in their data set Should analysts choose, they may revisit their comparable company set and make any revisions they deem necessary, such as eliminating potential outliers
Dr. Pratt theorizes:
When market value multiples among companies in an industry are tightly clustered, this suggests that these are the multiples that the market pays the most attention to in pricing companies and stocks in the industry That is, the denominator [e g discretionary earnings, EBITDA, etc ] that creates the tightly clustered multiple is the financial variable that tends to drive the market value. Therefore, a tight clustering of market value multiples may suggest that those multiples tend to deserve more weight than other multiples 32
DealStats reports three measures of central tendency, in addition to various percentiles figures. These measures of central tendency include:
1 Mean;
2 Median (also known as the 50th percentile); and
3 Harmonic Mean
30 Franz Ross, “‘Just One Thing’: The Most Reliable Variable for Use in the Market Approach,” Business Valuation Update, September 2004
31 Shannon Pratt and Alina Niculita, Valuing a Business, 5th edition, New York, McGraw-Hill, 2008, p 321 32 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 139
26 DealStats Companion Guide | bvresources.com/DealStats
The percentile figures reported include:
1 Minimum value;
2 10th percentile;
3 25th percentile;
4 75th percentile;
5 90th percentile; and
6 Maximum value
Many are familiar with the mean and the median, while fewer are familiar with the harmonic mean The mean is the arithmetic average and is computed by adding up a collection of numbers and dividing by their count The median is the middle number in an ordered list (when the numbers are sorted numerically, the median is the middle number in the set) If the median is higher than the mean, outliers may be causing a downward bias to the mean Alternatively, if the mean is higher than the median, out- liers may be causing an upward bias As an example, let’s as- sume the list in Exhibit 7 is the result of search and analysis of comparable companies
In Exhibit 7, we can see that the median is much more represen- tative of the central tendency of the sample set Outliers (5 30 and 10 40) can dramatically impact the mean, whereas the me- dian is less affected The analyst may also want to consider further analysis of the two outliers and the possibility of elimi- nating them from the sample set
The harmonic mean, an alternative to the mean or median, can be used to give equal weight to each comparable company in summarizing ratios that have MVIC in the numerator The harmonic mean is the reciprocal of the average of the reciprocals of the compa- rable company multiples
Here is an example Toby Tatum provided:
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 com- parable 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
Exhibit 7. MVIC/Net Sales for Comparable Companies
MVIC/ Net
Sales
0.45
0.47
0.49
0.49
0.52
0.55
0.55
0.60
0.61 Middle of sorted set
0.62
0.70
0.74
0.76
0.80
0.91
5.30
10.40
0.61 Median
1.47 Mean (Average)
27 DealStats Companion Guide | bvresources.com/DealStats
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 busi- nesses 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 40x 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
Analysis from Bob Dohmeyer, Janae Castell, and Dr Herbert Kierulff has found that, generally, when the analyst’s subject company has profit margins that are near the average/median of the industry, or are near the average/median profit margins of the analyst’s selected comparable companies, the “best” (unbiased) measure of central tendency is the median multiple 33 Since the distribution of valu- ation multiples are not normal and are generally skewed, the median will be less than the mean and by definition represents an unbiased estimate due to the fact that the probability of a low value estimate error is equal to the probability of a high value estimate error, thereby making the median the “best” and unbiased estimator Further, given the skewed distribution of valuation multiples, estimating value using the harmonic mean results in the much greater probability of a low value estimate error than a high value estimate error. Therefore, they conclude that the harmonic mean is, by definition, a biased estimator
In another article, James Hitchner finds that most analysts prefer the median over the mean as it re- duces the effect of outliers 34 Hitchner goes on to note that, if analysts are considering using a mean, in some cases, they may wish to give more weight to specific observations.
Dr Pratt has noted that the harmonic mean holds a certain amount of appeal, commenting, “Although the harmonic mean is not used frequently, probably because it is unfamiliar to most readers of valua- tion reports, it is conceptually a very attractive alternative measure to central tendency ”35
When comparing the harmonic mean to the arithmetic mean, Gilbert Matthews finds that the arith- metic mean is biased upward, noting that the arithmetic mean of ratios with prices in the numerator always gives greater weight to higher multiples in the sample than to lower multiples 36 When com- paring the harmonic mean to the median, he finds that, although the median is a better measure of central tendency than the arithmetic mean, it effectively eliminates the information in the remaining multiples. He concludes that:
33 Bob Dohmeyer, Janae Castell, and Herbert Kierulff, “Mean, Median, Harmonic Mean: Which Is Best?” Business Valuation Update, January 2015
34 James Hitchner, “About When to Use the Mean, Median, or Both,” CPA Expert, Winter 2005, p 10 35 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 140 36 Gilbert Matthews, “When Averaging Multiples, Apply the Harmonic Mean,” Business Valuation Update, June 2006
28 DealStats Companion Guide | bvresources.com/DealStats
In sum, the harmonic mean is statistically more accurate than the arithmetic mean to measure the central tendency of ratios with price in the numerator, and it is more informative than the median The valuation community should adopt the practice of using the harmonic mean for averaging multiples
It is also important to note that the value the analyst selects (whether it be the median, mean, or har- monic mean) is typically considered a starting point. Based on the financial analysis of the subject company compared to the guideline companies, this value may be adjusted up or down. Dr. Pratt notes that an analyst may adjust an observed multiple upward or downward by a percentage or may use a multiple toward the upper or lower end of the range 37 Each multiple may even receive individual atten- tion. Dr. Pratt provides an example:
[A] company with an above-average return on sales usually would be accorded an above-average price/sales or MVIC/sales multiple. The same company could have a below-average return on book value, which may suggest a below-average price/book value or MVIC/book value multiple.
Research from Dohmeyer and Kierulff found that multiples derived from comparable transactions should be adjusted for profitability.38 Dohmeyer and Kierulff wanted to test the conventional wisdom that states, “[C]ompanies with superior margins deserve a premium multiple, and companies with inferior margins deserver an inferior multiple ” Their research covering thousands of small-business transactions found that the price/revenue multiple was highly correlated with profit margins (such as SDE margin)—the higher the profit margin, the higher the price/revenue multiple. While this was in line with common thought, their research also discovered that the multiples based on profit (such as price/ SDE or price to EBITDA) were highly correlated with profit margins (such as SDE margin or EBITDA margin), but the higher the margin, the lower multiple
37 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 141 38 Bob Dohmeyer and Herbert Kierulff, “A Forgotten Statistical Concept Tells Why Your Multiple May Be Wrong,” Business
Valuation Update, November 2014
Exhibit 8. Multiple of SDE Relationship With SDE Margin
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
A ct
ua l S
D E
M ul
tip le
/In du
st ry
M ed
ia n
S D
E M
ul tip
le
Actual SDE Margin/Industry Median SDE Margin
29 DealStats Companion Guide | bvresources.com/DealStats
Their analysis of private-company transaction data finds that companies with higher profit margins compared with the industry norm should be matched via regression analysis with lower multiples of profit compared with the industry norm, and vice versa. Further, they demonstrate that the data show that using a central tendency measure such as median or harmonic mean results in value estimation errors as demonstrated in Exhibit 8 They go on to demonstrate that using regression analysis is a superior and flexible measure of central tendency that adjusts for relative profitability.
Others have advocated for using regression analysis on transaction data instead of a measure of central tendency Others have advocated for using regression analysis on transaction data instead of measures of central tendency. Fred Hall’s research shows that price/revenue is positively correlated with profit margin (SDE margin) and finds that price/SDE is inversely correlated with profit margin.39 Hall finds that the regression calculations of the independent variable (SDE margin) regressed against the dependent variables (the revenue multiple and the SDE multiple) to be superior to harmonic means and medians 40 This matches the findings of Dohmeyer and Kierulff, who also noted that regression of the revenue multiple and SDE multiple against SDE margins to be an objectively superior estimator of the revenue multiple and SDE multiple than measures of central tendency 41
Ultimately, whichever multiple(s) the analyst selects are based on the analyst’s reasoned judgement and analysis of the guideline companies in comparison with the subject company being valued.
APPLYING VALUATION MULTIPLES The DealStats database contains both stock transactions and asset transactions While both can be used to develop a value indication for a subject company, the user should be mindful of the differences between the two types of sales Understanding the differences between asset sales and stock sales will help the analyst determine how to proceed when using the multiples An analyst may separate the stock and asset sales and apply the multiples separately (with the appropriate assets and liabilities added and subtracted from the results of each to determine the subject’s equity value)
Alternatively, the analyst may choose to restate the selling prices and multiples among their compa- rable transactions This could include making the selling prices in the asset sale transactions com- parable to those in stock sale transactions by adding net working capital to the asset sale prices (though, if inventory did transfer, which is common among assets sales, it should be subtracted from the addition of the net working capital, so it is not double counted) The analyst may decide to convert the stock sale prices to an asset sale equivalent price The below example (Exhibit 9) from Fred Hall demonstrates this 42
39 Fred Hall, “How Regression Analysis Makes the Market Approach More Valuable,” Business Valuation Update, April 2012 40 Fred Hall, The Use of Regression Analysis in the Market Approach webinar, May 14, 2015, Business Valuation Resources 41 Bob Dohmeyer and Herbert Kierulff, “A Forgotten Statistical Concept Tells Why Your Multiple May Be Wrong,” Business
Valuation Update, November 2014 42 Fred Hall, “Compare Apples to Apples: Investigating the Differences in Transactional Databases,” Business Valuation Update,
March 2013
30 DealStats Companion Guide | bvresources.com/DealStats
Exhibit 9. Stock Sale Conversion Sample
MVIC (cash, stock, notes, debt assumed) $13,994,000
Plus: assumed non-interest-bearing debt $625,000
Plus: employment/consulting agreement $0
Less: cash ($0)
Less: accounts receivable ($856,000)
Plus: other assets (prepaids and for-sale assets) ($1,572,000)
= Asset value equivalent $12,191,000
(The value of inventory, fixtures, and goodwill)
The analyst could also consider restating the multiples to include a common set of assets, which includes intangible value plus the most common tangible assets found in the group of comparable companies This may be the most direct method to restate the selling prices among the comparable companies This is sometimes done by adding the total intangibles value from the provided purchase price allocation to the FF&E value from the provided purchase price allocation (the value of inventory could also be added, should the analyst wish)
In a stock sale, it is generally assumed that all assets and liabilities transfer (if the target had debt and that debt transferred to the buyer, it is noted in the “Debt Assumed” field). In an asset sale, inventory, fixed assets, leasehold improvements, identifiable intangibles (e.g., trade names, customer lists), and goodwill usually transfer In an asset sale, generally neither cash and accounts receivable transfer nor do liabilities If real estate is acquired in a transaction and DealStats is able to determine its value, that value is removed from the reported selling price 43
When available, a purchase price allocation is reported for the transaction that details which assets and liabilities transferred, along with their corresponding values It is important to look at the pur- chase price allocation and additional notes sections of the DealStats transaction report to see whether a purchase price allocation is given for the sale. This allocation will show definitively which assets transacted as well as their agreed-upon values by the buyer and the seller A user can also review a group of transactions in the database by NAICS or SIC code to see what typically transfers For more information, visit the DealStats FAQ page
Exhibit 10 depicts the general application of asset sale multiples and stock sale multiples from the DealStats database. Note that these are just general examples and are based on the typical assump- tions for asset and stock sales A user should carefully review each transaction to see exactly what assets transferred These assumptions may be useful when no purchase price allocation is available and it cannot be determined exactly what assets transferred Alternatively, the analyst could review other transactions within the industry for guidance on what assets commonly transfer
43 The exception to this are certain industries, such as oil and gas, where the predominant asset of the acquired business is land and removing the value of land creates a negative net asset value and therefore a negative selling price DealStats re- ports the value of any acquired land and buildings in the “Deal Terms” and “Additional Notes” fields.
31 DealStats Companion Guide | bvresources.com/DealStats
Exhibit 10. Asset Sale Multiples and Stock Sale Multiples From DealStats
Asset Multiples Stock Multiples
Subject company revenue or earnings Subject company revenue or earnings
× Valuation multiple (as selected by user) × Valuation multiple (as selected by user)
= Indicated market value of invested capital = Indicated market value of invested capital
+ Assets not included in the multiple (usually AR and cash) - Interest-bearing debt
- Liabilities excluded from the multiple (usually all) and interest-bearing debt + Real estate
+ Real estate + Nonoperating assets
+ Nonoperating assets - Nonoperating liabilities
- Nonoperating liabilities = Indicated value of equity
= Indicated value of equity
Note: These are just general examples. A user should review each transaction individually to see exactly what assets transferred.
When using asset sale transactions in DealStats, the typical application of the valuation multiple looks like what is shown in Exhibit 11
Exhibit 11. Application of the Valuation Multiple When Using Asset Sale Transactions
Subject company net sales $7,000,000
MVIC/net sales × 0.3
Value indication $2,100,000
Assets not included in multiple1 + $600,000
Liabilities not included in multiple2 and debt - $1,100,000
Real estate3 + $650,000
Net nonoperating assets and liabilities4 + $100,000
Value of equity $2,350,000
1 Such as cash and accounts receivable 2 Usually all 3 Generally removed from the DealStats selling price 4 May be negative value if nonoperating liabilities are greater than nonoperating assets
32 DealStats Companion Guide | bvresources.com/DealStats
When using stock sale transactions in DealStats, the typical application of the valuation multiple looks like what is shown in Exhibit 12
Exhibit 12. Application of the Valuation Multiple When Using Stock Sale Transactions
Subject company net sales $7,000,000
MVIC/net sales x 0.4
Value indication1 $2,800,000
Interest-bearing debt - $1,000,000
Value of equity before other items $1,800,000
Real estate2 + $650,000
Net nonoperating assets and liabilities3 + $100,000
Value of equity $2,550,000
1 Generally includes all operating assets and non-interest-bearing liabilities 2.Generally removed from the DealStats selling price 3 May be negative value if nonoperating liabilities are greater than nonoperating assets
When using DealsStats, the analyst may wish to consider whether minority discounts (discounts for lack of control) and marketability discounts (discounts for lack of marketability) are applicable All of the transactions in DealStats are 100% transactions—there are no partial interest purchase trans- actions As a result, analysts may wish to apply a minority discount to their pro rata minority equity value Practitioners have debated whether marketability discounts are applicable or not Dr Shannon Pratt has written:
Because the indicated value is a control value, it normally would not be appropriate to add a control premium One or more discounts may be appropriate
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 salable, which could be the basis for a lack of marketability discount. Also, there may be considerable risk as to whether the estimate value can actually be attained
If valuing a minority interest in a privately held company, a discount for lack of control usually would be warranted, and frequently a discount for lack of marketability as well Most analysts (and most courts) prefer to deal with the marketability and minority discounts separately because, although related, they are separate concepts and lend themselves to being quantified by different types of market evidence and analysis It is quite common for a minority interest in a closely held company to be worth less than half its proportionate share of value of a controlling interest 44
44 Shannon Pratt, The Market Approach to Valuing Businesses, New Jersey, Wiley & Sons, 2005, p 41-42
33 DealStats Companion Guide | bvresources.com/DealStats
Ultimately practitioners need to decide which discounts to apply, if any, based on their knowledge, experience, and the facts pertaining to their specific engagement. A common source of minority dis- counts is the FactSet Mergerstat/BVR Control Premium Study Common sources for marketability dis- counts are the Stout Restricted Stock Study and the Valuation Advisors Discount for Lack of Marketability Study
34 DealStats Companion Guide | bvresources.com/DealStats
USING DEALSTATS Please visit our video tutorial page to view a series of helpful videos that demonstrate how to use the various sections and functions available in DealStats
QUICK SEARCH The Quick Search tab allows users to quickly filter their transactions based on the most commonly searched items, including industry (SIC code, NAICS code, and business description), sale date, net sales, and more You can add additional search items that are not included in the Quick Search by default by clicking on the “Add Search Field” button
35 DealStats Companion Guide | bvresources.com/DealStats
Typing text into the “Search All Text Fields” box on the Quick Search tab will conduct a search in ev- ery available text field across the database. In the example below, typing “semiconductor” into the “Search All Text Fields” box returns all transactions that have the term “semiconductor” present in any field, such as in the “Business Description” field, “Additional Notes” field, “Deal Terms” field, and more.
SEARCH The Search tab allows the user to conduct a search using any field available in DealStats Users can specify as many pieces of search criteria as they wish on the Search tab
36 DealStats Companion Guide | bvresources.com/DealStats
There is “And” or “Or” logic to link the various pieces of criteria together One example is TargetType is Private AND Revenues are between $100,000 Another example is Target Country is United States OR Canada Currently, the “And” and “Or” logic applies to all selected criteria A future update will allow the “And” and “Or” criteria to be mixed in the Search tab
37 DealStats Companion Guide | bvresources.com/DealStats
When searching for an available field in the database, users can either begin typing into the available search box (in this example, fields with “EBITDA” in their name), or they can select the category of fields they wish to select from (in this example, a full list of fields in the Income Statement category).
38 DealStats Companion Guide | bvresources.com/DealStats
To remove any specified piece of criteria, click the trash can icon in the right corner of the criteria box.
Please note that the Quick Search tab criteria and Search tab criteria are joined with “AND” logic.
39 DealStats Companion Guide | bvresources.com/DealStats
DISPLAY GRID After criteria have been selected in the Quick Search tab or Search tab (or both), transactions will begin to filter out and the remaining transactions that meet the specified criteria will be displayed below in a grid The results in this grid are paginated The default number of transactions displayed per page is 10, though a maximum of 100 transactions per page can be displayed On the right, the total number of transactions and the total number of pages are displayed A user can use the page navigation menu to advance pages or jump to a specified page.
40 DealStats Companion Guide | bvresources.com/DealStats
To open a transaction report for a specific deal, click the orange paper icon that appears in the row of that transaction report. To generate one file that contains all transactions that meet the specified criteria, click the orange paper icon that appears in the top-right box (in this example, the icon next to the “SIC” column heading) After opening a transaction report, or a batch of transaction reports, right click on the page and select “Print” to either print to PDF or paper
In the display grid, transactions can be removed by unchecking the corresponding box that appears in the row for that transaction The transaction will not disappear (so it can be readded later, if neces- sary), but the data for this transaction will not be included in any of the summary statistics and graphs that are created Also, the transactions within the grid can be sorted by any of the displayed columns by clicking on the column header title (for example, clicking on “Sale Date” will sort by the “Sale Date” field). Clicking the column header title once will sort the transactions by that field in ascending order- ing. Clicking the same column header a second time will then sort the transactions by that field in descending order
41 DealStats Companion Guide | bvresources.com/DealStats
DISPLAY The Display tab allows users to select which fields (columns of data) appear in their display grid. First, click on an item under the “Column Groups” section on the left In the middle, under the “Available Data” section, a list of available fields that correspond with the selected column group will appear. Now, any item from the “Available Data” list can be dragged over to the “Displayed Data” list on the right. The order of the fields can be changed by dragging and moving the fields in the “Displayed Data” list. The selected fields, and their order, will now be updated in the data grid that displays the transac- tions that have met the user’s search criteria. To remove a field, click on the trashcan icon next to the field.
42 DealStats Companion Guide | bvresources.com/DealStats
A user can type a term into the text search field under “Column Groups” to identify all available fields that contain that term In the example below, typing “description” displays the “Non-Compete Descrip- tion” and “Employment Agreement Description” fields in the “Available Data” fields. Note that, because the “Target Business Description” field is already included under “Displayed Data,” it will not also ap- pear in the “Available Data” list
43 DealStats Companion Guide | bvresources.com/DealStats
The text search field also identifies calculations that utilize the specified term. Here, typing “sales” returns the fields that use “sales” in their calculation (e.g., the “Net Profit Margin” field is displayed in the “Available Data” list because the “Net Sales” field is used as the denominator: Net Income/Net Sales) Note that, because Net Sales is already included under “Displayed Data,” it will not also appear in the “Available Data” list
44 DealStats Companion Guide | bvresources.com/DealStats
SORT The Sort tab allows users to conduct multifield sorts in the displayed data grid. Typing a term into the box under “Column Groups” will return all the fields that contain that term or utilize that field in a calcu- lation. Categories under “Column Groups” can be selected, and the available fields will be displayed in the “Sortable Data” column Fields available in the “Sortable Data” column can be dragged and moved over to the “Sorting Selection” column. Here, select the first field in the “Sorting Selection” column, then choose “ASC” for ascending, “DESC” for descending, or “Unsorted.” Then, select the next field and specify a sort. The fields in “Sorting Selection” can be dragged and moved to change their sort order.
45 DealStats Companion Guide | bvresources.com/DealStats
STATISTICS The Statistics tab presents all the summary statistics for the transactions that are displayed in the data grid of transactions (not including those transactions that have been unchecked) This includes the transactions that met all the user-selected criteria in the Quick Search and Search tabs
46 DealStats Companion Guide | bvresources.com/DealStats
INSIGHTS The Insights tab displays four different types of graphs: interquartile ranges (which display the 25th percentile, the median, and the 75th percentile), scatter plots, stacked bar charts, and distribution/ frequency graphs These graphs are created using the transactions that are displayed in the data grid of transactions (not including those transactions that have been unchecked) This includes the trans- actions that met all the user-selected criteria in the Quick Search and Search tabs
47 DealStats Companion Guide | bvresources.com/DealStats
48 DealStats Companion Guide | bvresources.com/DealStats
SUMMARY The Summary tab provides a summary of the user’s search criteria, as well as a summary of the valu- ation multiples, margins, and ratios from the group of transactions that met the user-selected criteria In the top-right corner of the Summary tab, there is a button to “Copy” the available information Click- ing this button copies all of the information for the user From there, the information can be pasted into the user’s valuation report or other document
49 DealStats Companion Guide | bvresources.com/DealStats
MULTIPLES The Multiples tab allows the user to enter information about their subject company and apply the Deal- Stats multiples to their subject company. The multiples the user applies will come from those present on the Statistics tab, which contains the summary statics for the user’s filtered transaction data set. On the Multiples tab, the user can apply the multiples for the median, mean, harmonic mean, and other percentile measures from their selected data set. The first section allows the user to weight the results of the application of the multiples, while the second section allows the user to select percentages where the total contribution from each multiple is summed up
50 DealStats Companion Guide | bvresources.com/DealStats
EQUITY The Equity tab provides a general template when using stock sale and asset sale transactions The provided template depicts the general application of asset sale and stock sale multiples from the DealStats database Note that these are general examples and are based on the typical assumptions for asset and stock sales A user should carefully review each transaction to see exactly what assets transferred and ensure that these templates should be used These assumptions may be useful when no purchase price allocation is available and it cannot be determined exactly what assets transferred
The values calculated from the Multiples tab are carried over to the Equity tab Where relevant, the user can add back assets not included in the multiple, subtract liabilities not included in the multiple, and subtract debt to reach an equity value The user can also calculate a pro-rate share for non-100% equity interests, apply a discount for lack of control, and apply a discount for lack of marketability
51 DealStats Companion Guide | bvresources.com/DealStats
DOWNLOAD The Download tab is used to export the data to Excel. There are three options: “Only Displayed Fields”, “All Available Fields”, and “Analysis Tabs ” The “Only Displayed Fields” option exports only those col- umns that have been selected for the data grid (which can be modified under the Display tab). The “All Available Fields” option exports all of the fields associated with the user’s transactions. The “Analysis Tabs” option exports all of the information from the Statistics, Insights, Summary, Multiples, and Equity tabs
Please note that the export limit is 500 transactions for the “Only Displayed Fields” and “All Available Fields” selections There is no export limit for the “Analysis Tabs” selection
RECENT, SAVE, AND RESET At the top-right corner of the screen, there are several options: “Recent,” “Save,” and “Reset.”
52 DealStats Companion Guide | bvresources.com/DealStats
The “Reset” option removes all of the user’s selected criteria, returning DealStats to its initial state upon visiting the platform. Choosing this option brings up a prompt—selecting “Confirm” will reset all of the specified search criteria.
The “Save” option saves all of the user-specified criteria. There is an option to name the set of saved criteria (such as “Small Restaurants”), as well as a box to type any necessary notes that describe the criteria (such as “All transactions where the SIC code is 5812 and Net Sales were fewer than $300,000”)
53 DealStats Companion Guide | bvresources.com/DealStats
The “Recent” option is used to recall saved sets of screening criteria Clicking on “Recent” will bring up all of the user’s saved sets of screening criteria along with any accompanying notes that were specified when saving the criteria. Choosing this option brings up a prompt that provides the option to “Apply” the saved criteria or “Delete” the saved criteria Please note that deleting the saved criteria will remove it from your “Recent” list—do not select “Delete” unless you intend to delete this saved criteria
QUESTIONS?
The DealStats FAQ page provides answers to most frequently asked questions and is a great resource to learn more about DealStats You can also email us at dataquestions@bvresources com or call 503- 479-8200
About Business Valuation Resources Every informed stakeholder in business valuation, performance benchmarking, or risk assessment turns to Business Valuation Resources (BVR) for authoritative deal and market data, news and research, training, and expert opinion. Trust BVR for unimpeachable business valuation intelligence. BVR’s data, publications, and analysis have won in the boardroom and the courtroom for over two decades.
Learn more about all of our offerings at: bvresources.com
Deal & Market Data
• DealStats • BIZCOMPS • PitchBook Guideline Public Company Comps Tool • Economic Outlook Update • FactSet Mergerstat/BVR Control Premium Study • Stout Restricted Stock StudyTM • Valuation Advisors Discount for Lack of
Marketability Study • ktMINE Royalty Rate Data & License Agreements • First Research Industry, State & Province Profiles • BizMiner Industry Financial Reports • Mergerstat Review & Mergerstat Review Monthly • Duff & Phelps Cost of Capital Navigator • Valuation Handbook - U.S. Industry Cost of Capital • Valuation Handbook – International Guide to Cost
of Capital • Valuation Handbook – International Industry Cost
of Capital • Butler Pinkerton Calculator – Total Cost of Equity
and Public Company Specific Risk Calculator
Training & CPE
• Webinars • Web Workshops & Special Series • Desktop Learning Centers • Self-study CPE • eLearning
News & Research
• BVResearch Pro • Business Valuation Update • BVLaw • Economic Outlook Update • Business Reference Guide Online
Guides, Books & Reports
• Digital Library • Guides & Books • Special Reports • Legal Compendiums • Yearbooks
bvresources.com
Contact us at: 1-503-479-8200 or [email protected]
BVR What It’s Worth
Trustworthy business
valuations start here.
- DealStats Companion Guide
- Advisory Board
- Introduction
- Description of the Data
- DealStats Features
- Sample Transaction Report
- Data Sources and the Review Process
- Contributor Network
- Securities and Exchange Commission
- Fields and Definitions
- Source and Company Data
- Income Statement Data
- Balance Sheet Data
- Purchase Price Allocation Data
- Transaction and Other Data
- Company Structure Data
- Valuation Multiples
- Financial Ratios
- Why Use Transaction Data?
- Finding Comparable Companies
- Selecting Valuation Multiples
- Applying Valuation Multiples
- Using DealStats
- Quick Search
- Search
- Display Grid
- Display
- Sort
- Statistics
- Insights
- Summary
- Multiples
- Equity
- Download
- Recent, Save, and Reset
- Questions?
