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Transaction Data for Small and Mid-Sized Businesses |
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Can we find data to help us determine the value of a small or mid-sized business in the absence of an organized market?
In today’s internet world, data can certainly be found. The challenge is to understand, interpret and use the data so that they make sense. For those who are keen on quick fixes like “… a company is worth X times its revenue or X times its profits …” I would strongly recommend that they take a step back. We must first answer the basic questions of “what is included in the business transfer, what are we trying to value”, “what is the appropriate definition of profits” and “how does this company compares to its peers” before we even try to use any multiple.
A first source of data is the MLS where business sales are posted, such as www.businessesforsale.com. A major disadvantage though is that we can find the asking price, not the final transaction price. Some of these grant their premium users (i.e. those who pay) access to the final transaction data.
A second source of data is Tom West’s “Business Reference Guide”. Although it contains “Rules of Thumb” rather than actual data, these “rules” are obtained from intermediaries, i.e. from the people that are the closest to the market. One must be very careful regarding what is included in the sale when using these Rules of Thumb.
There are many databases with actual transaction data like Bizcomps, Pratt’s Stats, the Institute of Business Appraisers database, Peercomps etc. For the experienced analyst these databases are an indispensable tool despite the fact that some even an experienced analyst has trouble interpreting the data. From these databases summary tables have been deducted like “The ultimate valuation guide” compiled by Inc Magazine and Bizcomps “Valuation Guide”.
From these databases we can derive real-market revenue and profit multiples for small and mid-sized businesses. If we know how to use this data correctly we can derive an estimate of a firm’s value in the marketplace. It should be clear, however, that this is a task best performed by the experts and not the business owners.
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