R-Squared and Business Comparables

Dec 01 2017


How to determine the credibility of data when using a business comparables sales database?

The R-Squared method compares a data set to the line of regression on a statistical chart. In this case, we plot PeerComps’ transaction set, against the linear regression representing the relationship between Price and EBIDTA.

The R-Squared function score ranges from 0% to 100%, where 0% represents the lack of cohesion of a data set to its regression mean, and a score of 100% represents perfect cohesion. In business valuation, the industry generally considers an R-Squared of 75% and above as reasonable.

Above is a plot of PeerComps business comparables data comprised of all Medical Equipment and Supplies Wholesalers’ transactions (NAICS code 423450) between a revenue size of $1.0 million and $10.0 million. Typically, outliers are eliminated to avoid skewing of data, but since there were no significant outliers, no data points were eliminated in this study. Also, it is worth noting that all transactions in the data set are SBA approved, therefore eliminating the most outliers as a factor.

Here is where PeerComps scored:

  • 5% when comparing Price vs. EBIDTA
  • 2 % when comparing Price vs. SDE
  • 2% when comparing Price vs. Revenue

When speaking with a client based on PeerComps business comparables data shown above, you can provide a business valuation or price at approximately 95% accuracy based on EBIDTA or SDE. This also provides an explanation as to why a business valuation based on revenue is not recommended is most likely misleading. Why? Because, the empirical study shows that this market trades on multiples of earnings, and really cannot be gauged by the overall revenue with any certainty.

The R-Squared test is a function available in Excel (RSQ).  I would challenge you to run this test of data cohesion on other databases.  I have, and the clear winner is PeerComps.  In other databases, I occasionally get a score in the 75% – 80% range, however, in most cases to get there I would need to eliminate numerous outliers.  I have found PeerComps to be more accurate, composed of reliable data, and as with the example above I did not have to remove or add any data points.

In conclusion, PeerComps allows you to accurately present your client a valuation based on actual market transactions with a significantly higher level of accuracy. The R-Squared study also helps you explain how the market trades, and the legitimacy of the valuation method. PeerComps has a track record of accuracy that is completely unprecedented, and superior to other comparable sales databases.

By: Steve A. Mize, ASA with Douglas E. Teten 

Steven A. Mize is the Managing Partner at GCF Valuation, Inc. and PeerComps, Inc.  Steve is an Accredited Senior Appraiser with an extensive background in the business valuation. Please feel free to contact him with questions on this article or with any other business valuation questions.

 Douglas E. Teten is a Valuation Analyst at GCF Valuation and a self-proclaimed data geek.




2017 Business Valuation Trends and Forecast

Sep 06 2017

Business Valuation TrendsMuch of the success people find in owning and maintaining a business can be attributed to how much time is spent look towards the future, and with nearly 80% of business owners relying on the value of their business to fund retirement, it always helps to keep track of essential business valuation trends, as either a certified business appraiser or a business owner.

So, here’s our forecast for some of recently watched trends in the business valuation industry, and how to capitalize.

Manufacturing is a Must-Have

 High-revenue manufacturing companies—classified as those earning more than $10M a year—have seen a major increase in business value over the last five years (13% higher multiple). The increase is even higher for those making over $20M a year in revenue (39% higher multiple).

Subsequently, manufacturing businesses with an Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) greater than $2.5M on average sold for more than businesses under $2.5M.

What this could mean for small businesses is an incremental yet positive increase in overall business value over the next five years, especially niche industries within manufacturing including, but not limited to: packaging and labeling, joining, 3D printing, and ore.

The Service Industry Boom

Service industries, including hospitality, tourism and travel, and even certain health care services have seen an immense increase in value, too. For example, businesses with revenues greater than $4.9M sold at a 15% premium compared to those earning more.

Conversely, service businesses with EBITDAs greater than $1M sold at a 28% premium compared to businesses with EBITDAs under $1M.

Service industries rely heavily on both ideal environments and a good economic health to prosper, so it makes it somewhat difficult to keep a bead on industry performance. It can be determined, though, that small businesses in the service industry could see increased value parallel to the success of larger companies within the same industry.

Get a Trusted Business Valuation

Getting ahead and staying ahead of the curve starts with knowing the current financial health of a business. PeerComps has a collection of trusted business valuation tools and services that can help gain a better sense of future changes, across multiple industries.

To learn more, contact us today, or get started with a free trial or subscription.




Knowing When a Business is Ready for Sale

Jul 19 2017

Selling a business.There may come a time in the lifespan of a current business where its owners find themselves at a financial and professional crossroads, so to speak. Perhaps there’s a desire to diversify, or maybe liquidate the business as a whole.

In some situations, though, business owners find that the best plan of action is to sell. Knowing when to sell can be a difficult decision to make, so we’ve created a comprehensive guide to help steer seller agreements in the most lucrative direction.

Financial vs. Strategic Sales

If there’s ever been a wonder as to why one seller closed out with a much higher bottom line than another, the explanation is pretty simple. There are essentially two types of company sales: financial and strategic.

With any financial sale, the acquirer is typically looking to buy the rights to any potential streams of the profit the business may come across in the future. There’s a higher risk that comes with purchases like these because they’re mitigated based on projected success, regardless of how well the business has done in the past.

A strategic sale comes about when the acquirer is more interested in how the newly acquired business is going to bolster their existing portfolio of businesses and other investment. Think of it more as an augmentation, than an acquisition.

Most strategic sales tend to have a higher price tag because a buyer sees something in the company that could make it more profitable in the future.

Knowing this, making a conscious, thorough assessment of a business is the best way to determine which type of sale that company is most likely to be considered for.

Multi-year Plans

A business owner, or partnership, that’s worth its salt will already have a three, five or ten-year plan in place. Sometimes, the reason companies decide to sell is simply because it was already written in stone.

Businesses like these can be risky as well, because if it reaches its five-year limit, regardless of how successful the business ended up being, owners will still adhere to the plan and likely sell to the lowest bidder. Obviously, the other side of this situation is that a company has exceeded their year-to-year goals, making their business far more attractive to sellers. This could create a bidding war, of sorts, so be mindful.

Environmental Factors

Running any business is a mostly human responsibility, and as time goes on, there are factors that can cause a business owner to reconsider their current situation. Stress, anxiety, mental issues, and general disinterest are all viable reasons why someone would want to get out of the game.

Furthermore, depending on the type of industry, the tide may have changed out of favor of whatever a business owner had put all of their time and resources into. Changes in consumer demand, outsourcing and automation are all major factors that have caused companies to either diversify, or sell off. So, keeping an open dialogue with a business owner is a good way to stay one step ahead of the competition.

Assessing the Situation

It comes as no surprise, but keeping an open channel of communication with business owners, as well as staying abreast of industry changes and financial climates are the best way to gauge whether a company is on the verge of selling.

Getting an accurate and current business valuation is a viable way to build a rapport, too, so contact PeerComps today to learn more about our business valuation services, or start a free trial to see our software in action.




How (and Why) to Amicably End a Business Partnership

Jun 29 2017

Just like almost evEnding a business partnership ery other relationship, the decision to end a business partnership can be a devastating situation for all parties involved. After you’ve identified that the best course of action is in fact an amicable split, there are certain procedures you need to consider before, well, breaking up.

Here are some tips on how to dissolve a business partnership, while still maintaining a professional relationship that could still help you and your business succeed.

Consult Your Contracts

Assuming you and your business partners had the foresight to do this, reviewing any partnership agreements you’ve made is the first step toward ensuring everyone involved in the split gets what they’re both valued for and entitled to receive. Although it’s impossible for even the best-made agreements to cover every possible scenario, it can still give you potential insights on how to start the conversation.

More Concessions, Fewer Demands 

Unless it’s a situation where you and your partners refuse to budge on any agreements, it’s better to be as gracious as you can, while still holding onto the slice of the pie you deserve. Essentially, pick your battles and know that even if you couldn’t walk away with everything you wanted, you’ll live to fight another day.

Hire an Attorney  

This should go without saying, but when dealing with any kind of contractual agreements, it’s best to have someone who can represent your best interests, while keeping the process as streamlined and stress free as possible.

Plan an Exit Interview

Constructive criticism is a great way to get a gauge of how you’ve operated as both a professional and a partner. Granted, criticism is not the first thing people want to hear while in the midst of dissolving a partnership, but a little humility will certainly go a long way towards making yourself a stronger associate in your next business partnership.

Contact PeerComps today to learn more about our business valuation services, or start a free trial to see our software in action.




Broker Tips: How to Attract the Right Clients

May 31 2017

Couple discussing investments with a brokerFinding the right clients can be difficult. Depending on where they and their business stands, it may not always be the right fit for brokers looking to increase their list of clientele.

So, to help in the decision-making process, we’ve compiled some essential tips on how to vet potential businesses for sale, and build a portfolio of high-quality clients.

Nix the Upfront Fee

Nowadays, it’s common knowledge that brokers usually receive somewhere between 10 and 15% commission on the final sale price of a company. Requesting a large “upfront fee” to start the business valuation process will undoubtedly leave a sour taste in a business owner’s mouth, especially if it’s for a valuation that ends up not yielding the best results for the client.

Join Credible Networks

Trade associations, like the International Business Brokers Association, are a great way to get service offerings in front of the eyes of potential clients. Aside from that, most associations hold conferences, seminars and other educational opportunities to build the skills needed to go after larger, more lucrative businesses looking to sell.

Commit to Full-Time Service

Any broker worth their salt is going to get into a routine of selling businesses regularly. A full-time broker adds far more value to any business transaction than a part-time agent could. Not only is a full-time broker more likely to have a wider network of contacts, but they’ll also have a wider understanding of sales principles and best practices.

Focus on the Seller First

Although this sentiment can extend well beyond the brokerage realm, adjusting your focus to suit the seller’s needs and interests is a sure-fire way to create trust, credibility and set up a professional relationship that’s more likely to lead to referrals for future work. Putting the client first goes a long way in creating an ideal business transaction for all parties involved.

Lay a Foundation Early

When a potential seller is shopping around for a trusted broker, he or she will gravitate toward those who come to the table with a plan already in place. From prescreening buyers, to managing the first steps of the sale process, it shows the broker actually cares about the outcome of the sale as it relates to the business owner’s interests.

Getting Started

There are several approaches one can take when trying to form new business relationships with potential sellers, including securing an online business valuation for the company in question. Contact PeerComps today to learn more about our business valuation services, or start a free trial to see our software in action.




The Business Valuation Primer

Apr 28 2017

a meeting to discuss the importance of business valuationsWhether it’s the first, or the 51st, obtaining a proper online business valuation can be an uphill battle, if you go into the process without doing the right research. To help, we’ve compiled some important frequently asked questions to serve as guide while navigating the business valuation process.

Are Business Valuations Important?

Yes. Business owners of any kind are strongly advised to seek a valuation, regardless of the size of the business. There are many reasons why an owner would want their business valuated, including:

  • Buying or selling a business
  • Debt or equity financing
  • Taxes or estate planning
  • Compliance regulations
  • Divorce, business partner disputes, or bankruptcy
  • Gifting stock

So, getting a proper business valuation is far more important to preserving the worth of a business than one would think.

How Much Does a Business Valuation Cost?

Short answer? It depends.

Very few appraisers can come to an exact fee without first knowing why the business valuation is being conducted. Contingency fees can also play a major part in final tabulations. The general rule is that for business appraisal, best practice dictates that appraisers should not do work on any kind of contingent fee basis, as this could cause conflict. Conversely, contingent fees are common, if an appraiser is officially acting as a consultant or transaction advisor.

For a business appraisal, the profession’s ethical and professional standards forbid an appraiser from working on any kind of contingent fee basis due to the obvious conflict of interest that such an arrangement would create. However, when acting as a consultant or transaction advisor (and not as “an appraiser”), a contingent fee arrangement is common.

How Long Does It Take To Conduct a Business Valuation?

Any business valuation that’s worth its salt will require thoughtful analysis and preparation by the company doing the valuation. This means a proper one will take some time. On average, an appraisal made by a professional preparer usually takes anywhere between 24 to 48 hours, depending on the size of the business. Meanwhile, a full-scale valuation can take weeks or even months.

Naturally, an online valuation, or consultation, takes considerably less time to complete.

Who Can Provide A Credible Valuation?

Although there are plenty of capable business valuation services out there, only PeerComps can provide quality service and cutting-edge tools that generate accurate, comprehensive business valuations.

Contact PeerComps today to learn more about our business valuation services, or start a free trial to see our software in action.




How a Business Valuation Can Help Your Client Make a Smart Investment

Mar 30 2017

Help your clients make smart investments with a business valuation.Whether you’re facilitating an individual’s first ever business acquisition or working with a seasoned entrepreneur, there is always a common bottom line when it comes to investing in a business—making a smart decision that yields a return on investment.

When your clients look to you for assistance in the buying or selling process of a company, you want to be able to provide them with concrete, accurate information. But, how can you accurately predict the future of the investment in question?

Only a business valuation can give you the information you need on a listing to arm your clients with their best shot at a successful, smart investment. Here’s how a business valuation from PeerComps can help you help your clients.

Identify potential problems

Say a business up for sale is reporting high income numbers. Typically, this would be a telltale sign of a profitable investment. But, what if the business owner fails to mention that these numbers are not typical in the industry or that it has been an unusually busy season? If these factors are only identified after a sale has gone through, your client
could have a serious issue on their hands.

A thorough business valuation gives you and your client a deeper look at the background of a business and its industry, so you can easily identify if the listing is a feasible investment opportunity.

Accurate, unbiased view of business worth

The value of a business can be subjective, meaning a buyer and seller might have significantly different ideas of what a business is really worth. For a business owner selling a company, the hard work and tireless dedication that went into building that business plays a big part in their estimates. On the other hand, a buyer is trained to look at potential risks involved in making such a large investment.

This is why a business broker plays such a crucial role. As a third-party, business brokers are able to help appraise businesses from a neutral perspective, and business valuation services can help you accomplish just that.

Reducing your risk

Ultimately, every investor wants to accomplish one thing—take on as little risk as possible. While there is no 100 percent risk-free investment, you can help your clients mitigate the amount of uncertainty in their ventures by providing the accurate information a business valuation can offer. These valuations provide insights into the inner-workings and financials of potential investments, painting your client a clearer picture of the opportunity at hand.

Ready to provide your clients with the information they need? Start your PeerComps business valuation now and get your results in just minutes!




6 Tips for Getting an Accurate Business Valuation

Feb 27 2017

tips for getting an accurate business valuation, peercompsDetermining the value of one’s company is an important aspect for any business. In order for you to get an accurate business valuation analysis, there are a few aspects to consider.

Consult a Business Valuation Firm

An experienced business valuation firm can work with you throughout every step of the valuation process to ensure that you are getting a fair and accurate assessment. Whether you are part of a large corporation or are in need of small business valuation tools, professional business valuation services can significantly help.

Compare the Business With Similar Companies

Another helpful way to determine the value of a business is the comparison approach. Although these businesses might be competitors, you can certainly utilize their information. By comparing the company’s recent sales number to similar businesses in their industry, you will have an idea of whether or not they’re on the right track and how their
competitors are doing in comparison.

Focus On Earning Power and Risk Assessment

Keeping track of how much one is actually able to earn as a company is a great indicator of their projected value. In addition to paying attention to a company’s earning capabilities, addressing the risks that the organization takes and how it handles risk management are essential to the valuation process as well.

Take a Look at Your Overall Assets as a Company

Another way to help determine a business’ value is the asset approach. Although you will need to do more research in order to successfully determine a company’s value, their assets can be a great indicator.

Review Business History

While it is important to gather all your actual business data while determining the company’s value, you should also take a step back and pay attention to the historical context associated with the business.
Many business appraisals usually start by taking a look at the history involved.

Organize Everything

Clearly, there are plenty of ways to determine a company’s value, but perhaps the most important way to do so is by reviewing all the necessary financial statements and tax documents. It is essential that you remain organized throughout the entire valuation process so you can easily access all the required information. Don’t lose track of important items that could impact the value of the business.

If you want to work with an experienced business valuation firm and get an accurate appraisal, contact PeerComps today!




Creating a Transferable Family Business? Make Sure to Follow These 4 Steps

Jan 30 2017

family business, valuation, selling your family business

Across the U.S., there are roughly 21.1 million firms without any employees at all. These firms, as well a significant number of other organizations that do in fact have employees, are often run by families. Unfortunately, many family business owners are ill-prepared to transfer their business as they near eventual retirement.

Along with working with experienced and high quality business valuation services that can provide large or small business valuation tools, owners should be taking their futures seriously and consider creating a transferable family business.

Beginning the Planning Process

It is not wise to simply stand still in today’s business environment. Your wealth, family, and business could be at risk at a moment’s time in today’s market, which is why it is essential that you are staying up to date with both your transferable options as well as your business valuation tools.

On the bright side, however, it is never too late to start planning for the “long game” and focusing on aspects like your retirement and what your family business will become after you have passed on ownership duties to your children or other family relatives. It is extremely important to commit to a business assessment process and begin planning for the future.

Here are your first steps in moving toward a successful transferable family business.

  • Review Your Goals — The first thing you should do is sit down and really determine your personal and business goals for the future. If you want to be completely hands off from the business as you enter retirement, that is reasonable, but you might still want to at least have some control. Planning all this out is an important aspect of the future of the family business.
  • Take a Look at Your Financial Situation — Again, determining your financial advantages and disadvantages on a personal and professional level is key. You are obviously in charge of figuring out your personal finances, but using business valuation tools will provide you with the ability to better identify your company’s financial situation. Once you’ve figured out both of these aspects, you can keep looking toward the future for your business and personal life.
  • Determine Your Transfer Options — Talking to your family about internal transferring is an important part of this process, as you can get a better idea of who you want to be in charge in the future. This decision doesn’t have to be made in a split second, however, because it is so important. So really spend time considering every possibility and offer some form of training.
  • Review Your Plan — The final step before the transferring process is complete is to thoroughly review every aspect of your plan. Take a second look at your finances, your estate plans, and your wealth and investment plans you’ve outlined. Make sure you’re honest with yourself throughout the entire process, as well, especially when it comes to your finances.

If you need assistance from a professional business valuation firm contact PeerComps today.




5 Key Drivers that Make a Small Business More Valuable

Dec 23 2016

Follow these key drivers to improve your business valueSmall business valuations are essential not only for companies that are trying to not only determine their overall value, but for maintaining pertinent financial information, as well. Small business valuations are influenced by the need for a determination of value, but the value isn’t necessarily absolute.

Business valuation analysis is a process of measuring the worth of the entire business. There are a few key drivers that allow small businesses to improve their overall value.

Small Business Valuation Software

Utilizing proprietary technology for small business valuations can be great for your company. Using this kind of technology can give your business a competitive advantage in your field, allowing your business to stand out against your competition and improve your company’s value.

Know Your Market

If you are in control of your market, you will have a much easier time growing your company, increasing your revenue, and subsequently improving your value. The best way to get a stronger hold on your specific market is to focus on your clientele. You should have a loyal core group of customers and partners, but it’s just as important to have a diversified group of returning customers to really own your market.

Realistic Growth Strategies

You should have a both long-term and short-term plan for the future of your company. You should create a detailed outline going over your company’s expected growth, the goal you’re hoping to reach, and what your company is actually doing and then adjust accordingly. If you have a strong market share, loyal customers, well-documented finances, and excellent organization, you should stand a much better chance at improving your value.

Your Staff Matters

Although having loyal and dedicated customers is essential, having strong and committed employees is just as important for success. Focusing on your company’s culture and ensuring that every employee knows and understands the goal is key to succeeding and reaching the best possible value. Along with loyal employees, your company’s management team must reiterate these goals to everyone and continue to keep them motivated.

Focus on Efficiency

Simply focusing on the efficiency of your entire organization will help lead to overall success. Everything has to be connected, however, as a company that’s focused on efficiency but ignores its employees is destined to fail.

Contact PeerComps today to learn more about our business valuation services, or start a free trial to see your software in action.

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