5.20 Use of market data in private company valuations
As discussed in the article on the market method, comparable market data is useful if it is relevant but will be misleading if it is used inappropriately.
Compare a company operating in the limited service restaurant sector to a sauce and dressings manufacturer. A subscription database (no specific criteria entered) yields the following data on Enterprise Value as a multiple of (a) Sales (b) Gross Profit (c) Earnings before Interest (d) EBITDA and (e) Seller’s discretionary earnings (SDE):
Market data is useful if it is relevant but will be misleading if it is used inappropriately.
- The fast foods restaurant group sample size is large enough to drill deeper and likely find reasonably comparable businesses. The sauce manufacturers’ sample is unlikely to provide this opportunity;
- The valuation metrics for the restaurants are tightly grouped and may provide “real world” transaction data that is useful guidance for negotiating a sale. The metrics for the sauce manufacturers are more scattered and are unlikely to be of much assistance;
- The market data for the restaurants is thus reasonably useful. The data for the manufacturers is unlikely to be much help.
Contact MVI to discuss when market data is reliable enough to provide valuation guidance.