2.17 Industry analysis in valuators’ reports
The analysis of the risks and prospects of the industry in which a business operates is an important part of the preparation of a valuation report. It is possible to get an initial big picture view by considering the average “beta” of public companies operating in that industry.
Simply put, the industry beta is a measure of the difference between (a) the aggregate yield provided by public companies in that industry and (b) the aggregate yield of all public companies. The beta used in developing an appropriate capitalization rate may be a weighted average of betas for both the business’s primary industry and other industries to which it is exposed.
The industry in which a business operates has a significant impact on its valuation.
Although the industry beta provides an initial big picture view, the CBV should closely examine the industry in developing the specific company premium. This is where consideration is given to the industry in the context of the geo-political environment in which the business operates.
For example, an environmental remediation firm in Alberta’s oil patch will likely face different risks to an environmental remediation firm in downtown Vancouver.
The industry is also relevant when developing pro forma cashflow statements, given that all industries have different business cycles.
In using the adjusted net asset method, the industry will play a role in determining the fair market value of the company’s capital assets. A company operating in a vibrant industry can reasonably expect that its equipment will hold its value longer in an industry in decline.
A common misconception is that businesses in the same industry can all be valued using the same multiples, so it is important to note that many other factors are considered in developing the valuation conclusion.
Nevertheless, at MVI we use industry codes as the base for researching comparable business transaction metrics, for careful and judicious use in reasonableness testing.
Contact MVI to discuss how the industry in which you operate impacts the value of your business.