In order to do a proper business valuation, a professional must utilize the appropriate business valuation resources
Business valuation resources include databases with past business transactions, news and research, industry analysis & data and discount rate tables. It is very important for a valuation professional to use the right business valuation resources in order to assure the accuracy of data, to get a comprehensive understanding of the business he or she is valuing, and to be able to choose the appropriate discount rate and comparable merger and acquisition transactions.
The most important business valuation resources to consider
Deal and Market Data
This set of business valuation resources includes public company market data, merger and acquisition transaction data and valuation multiples data. Deal and market data resources are very useful when using market-based valuation approach. Public company market data providers usually include publicly traded companies by industry code or market sector, company profiles and historical financial statements, financial ratios, current and historical stock prices, analyst earnings growth forecasts, investment research reports and others. Data from public companies can be very useful when used as a benchmark to compare a private company to its publicly traded peers.
Mergers and acquisitions transaction data includes deal data from the sale/purchase of both private and public companies. This deal data includes asking price, sales price, sales terms, annual revenue, net income, EBITDA, owner compensation, total assets, and shareholders’ equity. Valuation multiples data providers compile data from past mergers and acquisitions of both public and private companies to create multiples for a wide range of industries. Merger and acquisition data and valuation multiples data are typically used when valuing a company using the comparable transactions method. Some of the more widely recognized providers include DealStats, BIZCOMPS, FactSet Mergerstat Review and Morningstar.
Economic and Industry Research and Data
Economic studies and industry research are important business valuation resources as they allow practitioners to understand the business they value, the dynamics of the industry it operates in, and what future growth expectations to use when projecting future earnings. Economic data and research providers are both private entities and governmental institutions. They provide data such as GDP growth (both historical and forecasted), cost of living, consumer price index and inflation data as well as government bond yields and interest rate data.
Governmental providers of data in the United States include the Bureau of Labor Statistics, the Department of the Treasury, Small Business Administration and the Federal Reserve Bank. They are usually free and offer reliable data. For industry research and analysis, a valuation professional must use resources that provide local and national data. Some of the most recognized providers of industry data and research are the credit rating agencies Moody’s and S&P, and other providers include MarketResearch.com, IBIS World and BizMiner.
Cost of Capital
Cost of Capital, Discount Rate or Required Return Rate is used with income-based valuation approach. It is quite an important concept and often the subject of dispute in court rooms. If a valuation professional selects a rate that is too low, it would return a value for the business that is too high, while a very high rate would undervalue a business. To avoid disputes and scrutiny, valuation professionals can use business valuation resources that provide commonly accepted guidelines for determining the cost of capital. Duff and Phelps Cost of Capital Navigator is one such widely accepted and useful tool for valuation professionals.
Discounts and Premiums
Sometimes, valuation professionals must take into consideration premiums and discounts that reflect the unique circumstances of the valued business. These discounts and premiums include minority interest discounts, control premiums, lack of marketability discounts, key person discounts and premiums, discounts for trapped-in capital gains taxes, discounts for environmental liabilities, and litigation discounts. Valuation professionals can obtain guidance for discounts and premiums by using different books and publications on the subject by authors that are recognized authority on the subject.
Valuing a business presents a unique set of challenges. We recommend you retain a certified valuation professional to obtain a realistic estimate of the value of your business. Contact us to help you with your business valuation needs or schedule a consultation.
Malescu Law P.A. – Business Lawyers