2002 AICPA National
Business Valuation
Conference
Market Transaction Method- Method or Sanity
Check?
Presented By:
Joseph S. Estabrook CPA/ABV, ASA
Assistance provided by
Steven M. Blubaugh
Ellin & Tucker, Chartered
Goals
Discuss the Guideline Company Method
Discuss the Market Transaction Method
Discuss the use of the various market
databases available: Pratt’s Stats, BizComps,
DoneDeals and the IBA Market Data Base
How the Market Transaction Method
compares to the guideline company data
Apply the Market Transaction Method in the
core track case study
Method or Sanity Check?
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MARKET APPROACH
Guideline Company Method
Market Transaction Method
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MARKET APPROACH
Guideline Company Method
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Where / When Method is Most
Appropriate
Level Valuation
l Minority
(because result is on minority
basis)
l Numerous Public Guideline
Companies
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IDENTIFY POTENTIAL
GUIDELINE COMPANIES
SIC Codes
Key Words
Peer Groups/Competitors (confirm
through management interview)
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Sources of Data
l One Source
l Compustat
l Global Researcher
l Bloomberg
l EDGAR
l Value Line
l Any source that provides publicly
traded company data
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Narrow Guideline Company
Selection
l SIC Code
l Business Description
l Revenue Ruling 59-60 States the Companies
may be in the Same “or Similar” Industry
l Size (Max 10 times revenues ideally)
l Companies with Similar Economic
Characteristics
l Comparable Ratio Analysis
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Number Guideline Companies
required
l At least 3
l 5 – 8 is Better
l More than 8 may not be
necessary
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Data Required
l Most Recent 12 Month Financials (Quarter
Ended closest to valuation date)
l Use information that was known or reasonably
knowable as of the valuation date
l Three Year Average Financial Data
l Stock Price as of Valuation Date
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Adjustments to data
l Objective: to put them on a comparable basis
to subject
l Nonrecurring items or events (strikes, closing of
facilities, unusual lawsuits, environmental
problems, etc.)
l Inventory Adjustment: LIFO to FIFO
l Non- Operating or Excess Assets / Liabilities
(Example: Plane, boat etc.)
l Discontinued Operations (Gain or Loss on
discontinued operations)
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MULTIPLES
MVIC/Revenues (IC)
MVIC/EBITDA (IC)
MVIC/EBIT (IC)
Price/EBT (Equity)
Price/Gross Cash Flow (Equity)
MVIC/Debt free net cash flow (IC)
Price/Net Cash Flow to Equity (Equity)
Price/Book Value (Equity)
Multiples specific to industry
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Adjustments to Multiples
l Based on Trend Analysis
l Industry Averages
l Ratio Analysis (Example: return on
sales above average, higher multiple)
l Select subset most like subject
(growth, margins, volatility, etc.)
l Adjustment based on a Percentage or
range (quartile)
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Multiple Selection and
Weightings
l Based on Knowledge of Industry (example:
service industry typically Price/Revenues,
Holding company Price/Book Value)
l Size and Nature of Company (example: smaller
companies we may choose multiples higher up
the income stream)
l Profitability (example: negative earnings, move
up earnings stream until positive)
l Availability of Data
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Value Conclusion
l Minority, Marketable value on a going concern
basis
l Market Value of Invested Capital (Need to
subtract interest bearing debt and other classes
of stock to arrive at Equity)
l Market Value of Equity
Control Premium may be required if valuation is
for controlling interest
Marketability Discount may be required if for a
Privately held value
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Common Errors
l Inadequate selection of guideline companies
l Improper use of multiples (naively applying either the
mean or median)
l Not making appropriate adjustments
l Arriving at wrong value conclusion
l Applying multiples to incorrect subject data (example:
Price/EBT applying to Earnings after tax)
l Using wrong date for stock price
l Using information that was not known at date of valuation
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MARKET APPROACH
Transaction Method
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Where/When Method is Most
Appropriate
l Controlling Interest Valuation
(Control Transactions)
l Numerous Acquisitions or
mergers available
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IDENTIFY POTENTIAL
TRANSACTIONS /
MERGERS
SIC Codes
Key Words for Business Description
Peer Groups/Competitors (confirm
through management interview)
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Sources of Data
Pratt’s Stats
IBA Market Data Base
BIZCOMPS
Done Deals
Company SEC Filings (10-K, 10-Q, 8-K
(special event))
Internal Subject Company Transactions
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Pratt’s Stats
Developed by Shannon Pratt and is the
official database of the International Business
Brokers Association
Started in 1997, transactions gathered from
business brokers, M&A intermediaries, and
other sources
It covers over 4000 transactions
69 data fields for each transaction and
appears to be the most comprehensive of the
private databases
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Pratt’s Stats
Searchable by SIC code, NAICS code,
time period and size
Available through BVResources at
www.BVMarketdata.com
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IBA Market Data Base
Developed by the Institute of Business
Appraisers and Raymond C. Miles,
CBA, ASA
Largest database with over 19,000
transactions
You Have to be a member of IBA to
access database
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IBA Market Data
The IBA Market Data Base includes the
following information:
l Type of business
l SIC code
l Annual gross revenue for year immediately prior to
sale of the business
l Annual earnings (before owner’s compensation,
interest and taxes) for year immediately prior to
sale of the business
l Owner’s compensation
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IBA Market Data Base
l Selling price of business
l Ratio of selling price to gross revenues
l Ratio of selling price to annual earnings
l General location of business
l Year and month of sale
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BIZCOMPS
Developed by Jack Sanders, CBA CBI
Information is based on small business
transactions
Divided into 3 geographical categories:
l Eastern
l Central
l Western
Studies are updated annually
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BIZCOMPS
Available through BIZCOMPS or
Online through:
l www.bvresources.com
l www.nvst.com
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Done Deals
Mid market companies sold for prices
between $1 million and $250 million
As of January 2002 there was over
5,000 transactions in the database
60% of the transactions are private
companies that are sold
10% of the transactions are subsidiaries
of public companies
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Done Deals
Searchable by SIC code, NAICS code,
time period and size
Available at www.donedeals.com
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Narrow Transactions
Transaction (Effective) Date (Example:
too old a transaction in volatile industry)
Size (Max 10 times Revenues, ideally)
Business Description
Available Multiple Data
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Number of Transactions
Required
l Preferably 3 or more
l Based on quality and
quantity of available data
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Adjustments to data
l Objective: to put them on a comparable basis
to subject
l Consideration of what is being purchased
(example: Purchasing stock [Equity Multiple] or
Assets [IC Multiple])
l Terms of Transaction (Example: non cash
terms)
l Restricted stock
l Non compete agreement
l Earn out
l Below Market Financing
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MULTIPLES
MVIC/Revenues (IC)
MVIC/EBITDA (IC)
MVIC/EBIT (IC)
Price/EBT (Equity)
Price/Gross Cash Flow (Equity)
MVIC/Debt free net cash flow (IC)
Price/Net Cash Flow to Equity (Equity)
Price/Book Value (Equity)
Multiples specific to industry
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Adjustments to Multiples
l Based on Trend Analysis
l Industry Averages
l Ratio Analysis (Example: return on sales
above average, higher multiple)
l Select subset most like subject (growth,
margins, volatility, etc.)
l Adjustment based on a Percentage or range
(quartile)
l More art than science – justify
considerations and selections
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Multiple Selection and
Weightings
l Based on Knowledge of Industry (example:
service industry typically Price/Revenues,
Holding company – asset intensive –
(Price/Book Value)
l Size and Nature of Company (example: smaller
companies we may choose multiples higher up
the income stream)
l Profitability (example: negative earnings, move
up earnings stream until positive)
l Availability of Data
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Value Conclusion
l Control, Privately Held value on a going concern basis
l Market Value of Invested Capital (Need to subtract
interest bearing debt and other classes of stock to
arrive at Equity)
l Market Value of Equity
Minority Discount may be required if valuation is for
minority interest
(Note: Typically in our model we apply a premium for
marketability due to the fact that we apply a marketability
discount on the reconciliation page)
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Common Errors
Using old transactions
Applying multiples inappropriately
(incorrect level of value)
Not taking into consideration terms of
deal
Misuse of discounts or premiums
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Case Study
Company valued is Trustworthy Homes
Purpose is for estate gifting
Interest being valued is 3% on a non-
controlling, non-marketable basis
Standard of value is fair market value
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Company Overview
Started in 1976 by James Trustworthy,
Trustworthy Homes specializes in building,
selling, and servicing planned and customized
single family homes. Trustworthy Homes has
operations in fourteen cities in the U.S.
ranging from Colorado to the Carolinas and
ranks as the third largest privately owned
homebuilder in the U.S.
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Market Approach
Guideline Company Method
Market Transaction Method
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Guideline Company
Total TTM TIC / TTM TIC / TTM TIC /
Name Ticker Invested Sales Sales EBITDA EBITDA EBIT EBIT
Cap
Beazer Homes USA, Inc. BZH $ 781.11 $ 1,583.43 0.49 $ 121.77 6.41 $ 114.59 6.82
Crossmann Communities CROS 464.81 621.04 0.75 59.84 7.77 55.76 8.34
Dominion Homes, Inc. DHOM 159.97 326.42 0.49 26.39 6.06 24.53 6.52
Fortress Group, Inc., The FRTG 348.16 715.14 0.49 21.37 16.29 19.06 18.27
Hovnanian Enterprises HOV 1,068.28 1,174.69 0.91 105.17 10.16 95.20 11.22
M.D.C. Holdings, Inc. MDC 1,261.25 1,750.92 0.72 224.99 5.61 203.20 6.21
M/I Schottenstein Homes MHO 495.59 935.09 0.53 93.04 5.33 90.92 5.45
Meritage Corporation MTH 321.37 520.47 0.62 60.25 5.33 56.77 5.66
Newmark Homes Corp. NHCH 273.84 640.51 0.43 46.76 5.86 42.74 6.41
Orleans Homebuilders OHB 141.05 221.03 0.64 14.67 9.61 14.42 9.78
Palm Harbor Homes, Inc. PHHM 536.93 689.42 0.78 61.20 8.77 46.61 11.52
Rottlund Company, Inc. RH 63.41 281.62 0.23 17.80 3.56 17.08 3.71
Schuler Homes, Inc. SHLR 493.91 647.78 0.76 47.47 10.40 40.51 12.19
Standard Pacific Corp. SPF 1,010.68 1,318.00 0.77 171.85 5.88 169.75 5.95
Toll Brothers, Inc. TOL 2,346.67 1,945.07 1.21 316.53 7.41 307.83 7.62
William Lyon Homes WLS 270.50 417.32 0.65 26.19 10.33 24.95 10.84
Median 668.60 0.64 60.05 6.91 51.19 7.22
Average 861.75 0.65 88.46 7.80 82.75 8.53
SAY 7.40 7.90
Notes:
TTM - Trailing twelve months
TIC - Total invested capital (equity + debt)
Source:
Market Guide, Inc. database as of 4/25/2001
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Guideline Company Method -
Capitalization of EBITDA
EBITDA of Trustworthy Homes, Inc. $ 66,102,000
Guideline Company EBITDA Capitalization Multiple 7.40
FMV of Total Invested Capital (marketable, non-controlling basis) $ 489,154,800
Less: Total Debt of Trustworthy Homes, Inc. (223,909,000)
FMV of Shareholders' Equity (marketable, non-controlling basis) $ 265,245,800
SAY $ 265,246,000
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Guideline Company Method -
Capitalization of EBIT
EBIT of Trustworthy Homes, Inc. $ 61,793,000
Guideline Company EBIT Capitalization Multiple 7.90
FMV of Total Invested Capital (marketable, non-controlling basis) $ 488,164,700
Less: Total Debt of Trustworthy Homes, Inc. (223,909,000)
FMV of Shareholders' Equity (marketable, non-controlling basis) $ 264,255,700
SAY $ 264,256,000
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Pratt Stats
Coefficient
Statistic o n
Cu t Range Mean Median of Variance
8/31/96 -
Sale Date 6 10/1/01 N/A N/A N/A
$648,269 -
Net Sales 6 $166,551,000 $42,586,400 $15,019,700 N/A
Market Value of
Invested Capital $215,000 -
(MVIC) 6 $112,002,000 $25,879,500 $3,900,000 N/A
$1,057 -
EBIT 6 $5,991,000 $2,233,125 $1,093,937 N/A
$1,057 -
Net Income 6 $5,991,000 $2,233,125 $1,093,937 N/A
Equity Price/Net Sales 6 0.107 - 0.571 0.347 0.306 0.512
Equity Price/Gross Cash
Flow 5 0.795 - 21.755 6.897 3.18 1.231
0.803 -
Equity Price/EBT 6 203.406 38.613 4.725 2.095
0.803 -
Equity Price/Net Income 6 203.406 38.613 4.725 2.095
Equity Price/Book Value
of Equity 0 --No statistics available--
MVIC/Net Sales 6 0.255 - 0.672 0.451 0.451 0.413
MVIC/EBIT 6 1.940 - 57.920 15.669 6.241 1.375
MVIC/EBITDA 5 1.922 - 17.148 6.8 5.76 0.891
MVIC/DiscEarnings 3 1.790 - 2.680 2.305 2.445 0.2
MVIC/BookValueof
Invested Capital 0 --No statistics available--
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Done Deals
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Business Type Annual
IBA
Discret. Owner's Sale Price/ Price/ Geographic Yr/Mo of
Gross Earnings Comp. Price Gross Earnings Sale
$000's $000's $000's $000's
Single-Family- 10733 1488 1667 2850 0.27 1.92 FL 97/04
Contractor Comml 10484 1425 7000 0.67 4.91 FL 99/10
Contractor Home
Improv. 5795 749 2075 0.36 2.77 FL 01/12
Contractor Comml 5195 1310 4400 0.85 3.36 FL 00/02
Construction
Services 3000 125 300 0.10 2.40 98/03
General contractor 1916 190 0.10 FL 00/01
Contractor Home
Impr 1620 352 450 0.28 1.28 FL
Contractor Home
Impr 1500 374 675 0.45 1.81 FL 99/12
Contractor Home
Impr 1500 191 675 0.45 3.53 FL 99/12
Building contract.,
gen. 1261 90 125 0.10 1.39 MD 92/04
Construction 1200 452 850 0.71 1.88 00/02
Mfg-Home Improv
Prod 651 165 600 0.92 3.63 FL
Custom Building 648 97 215 0.33 2.22 99/04
Construction
Services 250 65 125 0.50 1.92 98/02
Constr-Remodel 96 49 29 0.30 0.59 Boise_ ID 00/11
AVERAGE 0.43 2.40
MEDIAN 0.39 2.22
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Market Transaction
Method
Conclusion
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