What’s a business valuator to do? So much has changed in just the last few months, particularly the compression of asset prices across the board, that the normal data sources used for valuations are obsolete. This was the buzz and the subject of an excellent presentation by Stuart Bassin of the Zitelman Group at the latest Maryland chapter meeting of the National Association of Certified Valuation Analysts (NACVA), one of four primary associations for business valuation professionals (the others being AICPA, IBA, and ASA).
There is no shortage of databases to get business valuation metrics — BizComps for “Main Street Businesses”, IBA for asset transactions of 100% controlling interests, Done Deals for private and public middle market transactions. There are plenty of others. Each has its strengths and limitations and most provide some reasonably acceptable data points for companies based on industry, size, location, transaction type, and other important criteria. Where is the database, however, for valuation metrics in the months (and possibly years) following a loud pop of a worldwide asset bubble? Hmm, well . . . . there is none.
Like real estate valuation analysis, the best comps for business valuations are the most recent transactions. A similar transaction that closew is as good as it gets. Not anymore, or at least not right now. A comparable transaction within the last six months would be considered a post-bubble metric and not very useful — a seller would argue that the asset sold in a fire sale, impractically driving down valuations for everyone. A transaction that closed within the last half dozen years up until mid-2008 would be considered a bubble comp. Few, if any, buyers would purchase an asset based off comparable metrics of the past few years. Internet companies that were selling for 5x revenue and even greater might not even be marketable today at 1x revenues.
In troubled times business valuators must go beyond due diligence to rigorous diligence.
A good valuation today should review enough historical data to include comparable transactions leading up to and through at least one prior recession. In today’s extraordinary market, a look at valuations spanning twenty years showing pre- and post- recessionary trends through lean and frothy times would be more helpful than a few comps dated in the last six months. To value an internet company right now, 2i would include valuations from the mid- to late- 1990’s and the run up of the dotcom bubble through the crash and the recovery.
Further, good valuators will go beyond the customary databases and industry reports and contact venture firms, private equity groups, mezzanine lenders, and even senior commercial lenders to get a feel for the immediate expected market returns across the investment / risk value chain.
When shopping for a professional valuator be sure to ask them how they account for unprecedented economic times.
As always, insightful comments are welcome . . .
