By Kent Lance Schmidt, CVA, CBI, Former CPA
What We Will Cover
- Comparison of overall trends over decades
- Analysis of Terms of Sale
- Brief explanation of statistics
- Definition of SDE
- Adding Inventory to determine final value
- Selected output illustrations & sanity checks
- A brief overview of BIZCOMPS® database
- What it includes and excludes
- Differentiation between Mainstreet & Lower- Middle Market Transactions
- Cash vs. Financed Transactions
- Primary & secondary areas of comparison
- Comparison of transactions
- Started the BIZCOMPS® Studies in 1990
- BIZCOMPS® Software Developed in 1995
- Licensed Online Delivery in 1997
- Available Through NACVA/CEIR 1998
- Business Valuation Resources Since 2000
- Created BIZCOMPS® User Guide in 2004
- Current Software Updates Online in 2006
- Created Online Contribution in 2006
- Online Reward System Began in 2013
- BIZCOMPS® Online Began in 2013
- Added two more partners in 2014
“It is tough to make predictions, especially about the future!” –Yogi Berra
Not Public Information
Small business sale data, unlike real estate, is not readily available. There is no requirement for it to be publicly reported.
It must be privately collected and reported. The only individual repeatedly involved in transactions is a business intermediary.
A second Transaction Database for Small Businesses was developed by Jack Sanders in 1990 (IBA database was the first).
The BIZCOMPS® Database was developed to address the weakness of the IBA Database. It contains 21 fields of information and was based on the criteria Business Brokers felt important. Most information was contributed by Business Brokers with a Certification. The database today contains over 25,000 transactions.
- Currently has over 25,000 transactions
- 21 data fields
- Median revenue: $167,000
- Average selling price: $345,000
- Available online
(Single searches are available)
For BIZCOMPS® the data is only collected from business brokers and intermediaries. These individuals are able to provide the most reliable information.
Types of Financial Information
Each sold business database presents as much data as possible for their application.
Sales transactions can be either asset or stock sale transactions.
Business Transfers and Debt
Most main street businesses sales are asset sales, so the business transfers are debt free.
Lower-middle market transactions can transfer either debt free or with debt in place.
Cash transactions are compared to terms sales.
A term sale involves a down payment, with the balance of the purchase price paid over time.
In the current study 36% were cash transactions.
Bigger vs. Smaller
In transactions under $200,000, the owner’s remuneration is a big part of earnings.
In transactions over $500,000, the size effect comes into play. There is more management and the business is less dependent on the owner.
“Age is what makes furniture worth more and people worth less.” –Unknown
What Actually Sold
BIZCOMPS® transaction data only contains asset sales. Only the Fixtures and Equipment and Goodwill or Intangible assets are included in the transaction. Inventory is always indicated separately. Licenses to do business are included as well.
Ratio Last 10 Years Mean Median Prior 10 Years Mean Median
Sale/Gross Sales .53 .44 .46 .38
Sale/SDE* 2.0 1.8 2.0 1.8
*Seller’s Discretionary Earnings
Age of Data
Time does seem to affect the Gross Sales/Sale multiple, but not the earnings multiple. Older data does seem to lack credibility.
Comparing the Transactions
The BIZCOMPS® transaction data provides an opportunity to compare and discriminate between the transactions.
There are five primary and five secondary areas of comparison.
- By SIC or NAICS Code
- By Description of Business
- By Amount of Revenue
- By Profitability
- By Percent Rent Paid
Two More Areas
- By the Estimate of Fixture and Equipment Value
- By Franchise Information (if appropriate)
Visual inspection of all these factors can give considerable insight into these transactions and their relationship to each other.
Five Secondary Areas of Comparison
- By Down Payment & Terms
- By Size of Inventory
- By Days on Market
- By Number of Employees
- By Location
Terms of Sale
The circumstances are important. All cash or nearly cash sales are signs of a distressed business that the seller has no confidence in financing.
“Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital.” –Unknown
This chapter has a very basic discussion of statistics. A much more sophisticated method is linear regression or multi-linear regression, where the central tendency of the data is analyzed.
A quick and dirty formula for the calculation of Standard Deviation is on Page 12 of the User Guide. A brief explanation follows…
A shortcut method of calculating variance and standard deviation requires two quantities:
sum of the values and
sum of the squares of the measures
Ex = sum of the values
Ex2 = sum of the squares of measures
Guessing the standard deviation—to avoid tedious calculations—you can quickly obtain an estimate of the standard deviation by using the formula: S=r/4
Asset vs. Stock Sales
All transactions are reported as asset sales. All that sold was Fixtures/Equipment and Goodwill.
The values derived by BIZCOMPS® transactions data can be converted to a stock or equity value by…
First, adding all short-term and long-term assets less the book value of Fixtures and Equipment to the value created by BIZCOMPS® transaction data.
Second, subtract all liabilities.
- Result is stock or equity value.
Seller’s Discretionary Earnings
BIZCOMPS® uses Seller’s Discretionary Earnings (SDE) as a profit level. SDE is basically EBITDA plus the salary to one working owner.
Appraisers will generally add a normalized owner’s compensation to arrive at a true enterprise earnings.
Seller’s Discretionary Earnings (cont.)
SDE = NIBT (net income before taxes) plus Amortization, Depreciation, Interest, Owner’s Compensation, Owner’s Benefits, Non-Business Expenses, and One-Time Only Expenses.
BIZCOMPS® excludes inventory from the asking price and sale price. The amount of inventory is always shown.
The inclusion of inventory in smaller businesses would distort the sale price and lead to erratic ratios.
An excellent example is given in the User Guide.
The analyst can customize their client’s value by including client’s actual inventory.
Fixtures and Equipment
The Furniture, Fixture and Equipment value is the least verifiable field of information in BIZCOMPS®. They are rarely sold separately.
The ideal level of value is Fair Market Value in Place.
The FF&E Value is still useful in comparing transactions and helping to support the value developed.
Percent Rent Paid
Probably the most important ratio in terms of determining the viability of the business.
Higher rents simply put more profit in the hands of the landlord. Except for unusual businesses, 10% rent is the highest that should be paid.
BIZCOMPS® has franchise information where available, including royalty amounts.
Very little premium is added.
Just another cost of doing business.
625 transactions were franchises,
up from 482 franchises.
Days on Market
This indicator can also help the analyst to determine the desirability of the business.
Average time to sell is 218 days, with a median of 174 days. Businesses that take over 1,000 days to sell are difficult to sell, to say the least.
Number of Employees
Another way to compare transactions.
Both advantages and disadvantages to employees!
Sample Report (cont.)
Seller & Buyer Thoughts
We have covered most of the technicalities of the BIZCOMPS® Transaction Database.
So now, how do we use it in the real world?
Use of Data
To Be Useful Past a Sanity Check
- Need to have 5 to 30 comparable transactions
- Next put data on Scattergraph with Linear Regression Analysis
- Eliminate outliers or non-relevant data
- Look at other relevant databases
To Be Useful Past a Sanity Check (cont.)
Do not mix databases
Well, Maybe you can, Carefully!!
First Good News
You can mix the Gross Sales from each of the databases
- To use the ratios, be sure you know exactly what sold.
- First, you will need to add Inventory to BIZCOMPS® to equal value from ValuSource Market Comps (formerly IBA) & Deal Stats (formerly Pratt’s Stats).
- You may need to add non-compete agreements and consulting agreements to ValuSource Market Comps and Deal Stats.
If Valusource Market Comps indicates the Transaction was a Stock Sale, eliminate it. There is no way of knowing what was included in the sale. If any transaction had Real Estate involved, eliminate it. There is no way of knowing how the real estate expense was handled.
The SDE adjustments are more complex. You will need to add owner’s compensation and non-cash charges to operating expense in the Deal Stats data to calculate SDE.
(Note: Deal Stats has very few SDE entries; they are mostly all EBIT or EBITDA)
No adjustments are required to BIZCOMPS® entries.
To convert Deal Stats stock sale to an asset transaction, do the following example:
Market Value Invested Capital (MVIC) 13,994,000
Plus assumed non-interest bearing debt 625,000
Plus employment/consulting agreement 0
Less: cash (0)
Less: accounts receivable (856,000)
Less: other assets (prepaids and assets) (1,572,000)
Asset Sale Value Equivalent $12,191,000
The value of FF&E, Inventory, and Goodwill
References with additional information
- The 2020 BIZCOMPS® User Guide
- Compare Apples to Apples: Investigating the Differences in Transactions Databases
by C. Fed Hall III, MBA, CBA, AVA, published in Business Valuation Update 3/31/13
- The Comprehensive Guide to the Use and Application of the Transaction Databases by Heidi Walker, Third Edition, Business Valuation Resources
In closing, the three databases can be used together, but with extreme caution.
The best practice is to determine the value with each database separately, following the rules for each, and then compare the results.
- Determine how your client’s business varies from market data
- Adjust ratios to reflect differences
- Convert asset transactions to your client’s equity value
- Determine the weight for the Market Data Approach
- BIZCOMPS® has over 25,000 transactions
- More valid than “Rule of Thumb”
- Transaction only contains FF&E and Goodwill
- Inventory is not included but always given
- Many ways to discriminate between transactions
- Scattergraphs have Linear Regression Analysis
- All transactions are asset sales
- Can convert to Stock or Equity Value
- Excellent for Sanity Check
- Can carefully be used for Market Approach
- Databases are updated three times a year
- Both electronic and hard copy versions
For more info go to: https://bizcomps.com/
For assistance email: email@example.com