Content Contributed by the Appraisal Database and Mentoring Services (ADAM) Around the Valuation World in 90 Minutes Monthly Webzine

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1 Content Contributed by the Appraisal Database and Mentoring Services (ADAM) Around the Valuation World in 90 Minutes Monthly Webzine

2 DISCLAIMER All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means graphically, electronically, or mechanically, including photocopying, audio/video recording, or information storage and retrieval of any kind without the express written permission of the CTI, NACVA, and the presenter. The information contained in this presentation is only intended for general purposes. It is designed to provide authoritative and accurate information about the subject covered. It is sold with the understanding that the copyright holder is not engaged in rendering legal, accounting, or other professional service or advice. If legal or other expert advice is required, the services of an appropriate professional person should be sought. The material may not be applicable or suitable for the reader s specific needs or circumstances. Readers/viewers may not use this information as a substitute for consultation with qualified professionals in the subject matter presented here. Although information contained in this publication has been carefully compiled from sources believed to be reliable, the accuracy of the information is not guaranteed. It is neither intended nor should it be construed as either legal, accounting, and/or tax advice, nor as an opinion provided by the Consultants Training Institute (CTI), National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA), the presenter, or the presenter s firm. The authors specifically disclaim any personal liability, loss, or risk incurred as a consequence of the use, either directly or indirectly, of any information or advice given in these materials. The instructor s opinion may not reflect those of the CTI, NACVA, its policies, other instructors, or materials. Each occurrence and the facts of each occurrence are different. Changes in facts and/or policy terms may result in conclusions different than those stated herein. It is not intended to reflect the opinions or positions of the authors and instructors in relation to any specific case, but rather to be illustrative for educational purposes. The user is cautioned that this course is not all inclusive NACVA 5217 South State Street, Suite 400 Salt Lake City, UT, ALL RIGHTS RESERVED. The Consultants' Training Institute (CTI) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted through its web site: learningmarket.org National Association of Certified Valuators and Analysts 2

3 Compare Apples to Apples: Investigating the Differences in Transactional Databases by C. Fred Hall the III Overview Key Sources Key Points 2012 National Association of Certified Valuators and Analysts 3

4 Comments on BIZCOMPS, Pratt s Stats and the Institute of Business Appraisers (IBA) Database Key Sources Presented Analysis of Databases IBA versus BIZCOMPS IBA versus Pratt s Stats BIZCOMPS versus Pratt s Stats Summary 2012 National Association of Certified Valuators and Analysts 4

5 The Market Approach to Valuing Businesses by Shannon Pratt Compare Apples to Apples: Recommended Adjustments to Transactional Data at From ValuSource IBA Help Screens BVR Help Screens Procedural Manuals from Pratt's Stats and BIZCOMPS The Comprehensive Guide to the Use and Application of the Transaction Databases, by Nancy Fannon and Heidi Walker 2012 National Association of Certified Valuators and Analysts 5

6 Downloaded all Transactions from SIC 7501 to 7599 focusing on Manufacturers 489 from Pratt s Stats 668 from BIZCOMPS 881 from IBA Of 2,020 there were 148 Duplications with IBA and BIZCOMPS 43 Duplications with IBA and Pratt s Stats 71 Duplications with BIZCOMPS and Pratt s Stats 2012 National Association of Certified Valuators and Analysts 6

7 Frequently Lump Together All Three Sources Indicate Differences Revenues Selling Price Sellers Discretionary Earnings (SDE) 2012 National Association of Certified Valuators and Analysts 7

8 Of 148 Duplications Selling Price Different in 16 Dropped Four IBA Included Real Estate Only Noted Difference by Comparing Dropped Four Listed Selling Price Significantly Less Than SDE Can t be Data Processing Errors Eight Others with Minor Errors Dropped First Eight = 95% Selling Price Calculated the Same 2012 National Association of Certified Valuators and Analysts 8

9 IBA Claims to Deduct Real Estate Real Estate Involved in 42 of 881 Transactions In 27 Real Estate Was Included in the Total Transaction Price The Real Estate Should Have Been Deducted from the Selling Price. You Should Deduct any Comparable That Includes Real Estate from the IBA Database 2012 National Association of Certified Valuators and Analysts 9

10 Revenue All 148 Revenue Calculations Matched SDE Of 148 only 8 Had Discrepancies Three Had Same Value in Revenue and SDE Fields Two Had Real Estate Three Minor Data Processing or Other Errors 98% of Time the Same 2012 National Association of Certified Valuators and Analysts 10

11 IBA Does Not Mention to Add Back Depreciation to SDE BIZCOMPS Does Mention to Add Back Depreciation to SDE Both Calculate SDE the Same Way 2012 National Association of Certified Valuators and Analysts 11

12 After Making the Suggested Adjustments to Selling Price There Were No Discrepancies to Selling Price of the 43 Duplications Revenue Had 3 Discrepancies out of 43 IBA Uses Most Current P&L Available Pratt s Stats Uses the P&L When the Sale Began Remaining 40 Same No Significant Impact 2012 National Association of Certified Valuators and Analysts 12

13 After Adjusting for SDE, 21 Discrepancies Were Found out of 43 Duplicates Four Were Due to Pratt s Stats Adding Owners Compensation Which Double Counted SDE Three from P&L Difference (Last Slide) Seven Were Obvious Data Processing Errors Three Were from Procedural Differences IBA Not Adding Back Depreciation 98% of the Time IBA and Other Two Databases the Same 2012 National Association of Certified Valuators and Analysts 13

14 Selling Price Had Seven Discrepancies of 71 Duplications Three Involved Real Estate to the Buyer BIZCOMPS inadvertently Included Real Estate Unable to Determine Why for Other Four 95% of the Time the Same Pratt s Stats Selling Price Averaging 7% Higher Than BIZCOMPS 2012 National Association of Certified Valuators and Analysts 14

15 Revenue had Four Discrepancies of 71 Duplications Unable to Determine Why Pratt s Stats Reported Revenue 1% Higher than BIZCOMPS Reasonably Similar 2012 National Association of Certified Valuators and Analysts 15

16 SDE Difference Related to Reporting Systems As Was the Case with IBA Different Wording for Data Points 33 Discrepancies of 71 Duplicates Sixteen Data Entry Errors Double Counting of Owner s Income Operating Losses Inadvertently Excluded from SDE Owner s Salary Was Not Added Back to SDE Depreciation Was Not Added Back to SDE Different P&L Years Real Estate Was Involved 2012 National Association of Certified Valuators and Analysts 16

17 Of Remaining 17 Discrepancies One Was a Procedural Difference Sixteen Insufficient Data to Explain Why Pratt s Stats SDE Averaged 1.4% Less Than the SDE BIZCOMPS Reported 2012 National Association of Certified Valuators and Analysts 17

18 Transactions That Include Real Estate Have a Higher Probability of Error in the Calculation of Selling Price and SDE. Many Business Brokers do NOT Properly Calculate SDE When Real Estate is Involved They Often Add Back Interest Expense from Real Estate to Arrive at SDE Makes the Company Appear Far More Profitable Than One That Pays Rent. If Real Estate is Involved and There is Any Doubt Drop the Comparable 2012 National Association of Certified Valuators and Analysts 18

19 Appraisers Should Reject Any Comparable Where Selling Price or SDE Are Extraordinarily High or Low Compared to Revenue SDE/Revenue Example Most 15% to 30% and one at 49% - Drop 49% Likely SDE Not Properly Calculated Reject Any Comparables Whenever Key Data Points Are Missing Fixtures Inventory 2012 National Association of Certified Valuators and Analysts 19

20 For Liquor Stores, Usually Side Agreement with Buyer and Seller on Inventory Outside of Escrow High Revenue Multipliers Than the Rest Should Be Excluded Likely Include Accounts Receivable or Real Estate in the Selling Price Which the Submitting Broker Omitted. Low Revenue Multiplier Should Be Rejected Too Often Did Not Include Inventory Did Not State That the Buyer Assumed Liabilities 2012 National Association of Certified Valuators and Analysts 20

21 Sold for High Prices Compared to Revenue Because Selling Price Included Large Amounts of Fixtures and Equipment If Some Comparables Have High Values for F&E and Others Do Not, Exclude Those Without F&E Stock Sale Transactions Are Prone to Calculation Errors Corporations Frequently Sell With Receivables or Other Assets Included Brokers May Report the Selling Price with Receivables, But Not Indicate They Were Included in the Selling Price. The Selling Price May Have Been Reduced by the Amount of the Liabilities Assumed, but Not Mention This Unless a Specific Selling Price Allocation is Provided, You Should Not Attempt to Reconcile a Stock Sale 2012 National Association of Certified Valuators and Analysts 21

22 Go to Recommended Adjustments to Transactional Data Posted at Leads You To February 15, 2013 Free Download of Compare Apples to Apples: Investigating the Differences in Transactional Databases National Association of Certified Valuators and Analysts 22