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.
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.
Time does seem to affect the Gross Sales/Sale multiple, but not the earnings multiple. Older data does seem to lack credibility.
- 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.
The circumstances are important. All cash or nearly cash sales are signs of a distressed business that the seller has no confidence in financing.
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
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.
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.
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.
Another way to compare transactions.
Both advantages and disadvantages to employees!
- 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
- 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
For more info go to: https://bizcomps.com/
For assistance email: lance@nationalbusinessappraisers.com