4Q 2011
Quarterly Private Deal & Economic Outlook Update
Summer 2011
Powered by:
4Q 2011
Quarterly Private Deal & Economic Outlook Update Menden & Menden is proud to introduce the Quarterly Private Deal & Economic Outlook Update for financial professionals. Powered by Business Valuation Resources robust data offerings, this report is your trusted outlook for the trends in private M&A deal pricing and the U.S. economy. The Pratt’s Stats® data indicates that, in recent years, larger companies tended to have larger Selling Price/ EBIT and Selling Price/EBITDA multiples than smaller companies. In other words, as a percentage of EBIT and EBITDA, larger companies tended to sell for more than smaller companies. Over the years, the retail trade, wholesale trade and construction sectors tended to sell for less than the “All Industries” benchmark, while the manufacturing, services, transportation, communications, electric gas and sanitary sectors tended to sell for a premium to the “All Industries” benchmark. Economic reports indicate slow growth ahead. The Consumer Confidence Index dropped for the second consecutive month as fewer consumers see business and labor market conditions improving over the next six months. Some positive news was that consumer prices and producer prices fell for the first time in 12 months, while retail sales increased slightly. Both housing starts and building permit authorizations climbed in June, but home sales remained weak. The S&P 500 dropped 1.83% this month (for a year-to-date return of 5.01%). The 10-Year Treasury note increased 13 basis points to 3.18% (for a year-to-date decrease of 12 basis points). This newsletter is a publication of Menden & Menden. We provide a wide range of business and financial services including the valuation of businesses, business ownership interests, intangible assets, and financial litigation support. For further information on experience and capabilities, or for additional copies of this newsletter, please contact us today.
John Smith, Partner Menden & Menden (503) 555-1234
The Economy Appears Poised For Slow Growth, And Many Private Company Valuations Remain Down From Their Peak Private Deal Update The below table provides summary information on the transactions that will be analyzed for the following tables and graph. The data set was provided by Pratt’s Stats®, an online database containing full transaction details on more than 17,000 sold private businesses that were acquired by private or public buyers. For the purposes of our analysis, we will only use those transactions where the buyer was private. Summary Information (private buyers only) 2003 Count 701 Median $449,596 Revenue Average $1,302,753 Revenue Median $200,000 Selling Price Average $589,046 Selling Price
2004
2005
2006
2007
2008
2009
2010
938
1,025
1,029
1,145
1,434
920
848
$448,119
$448,318
$490,000
$500,077
$440,906
$456,270
$390,770
$1,145,455
$1,292,285
$1,428,820
$2,566,962
$1,209,800
$1,500,879
$956,737
$200,000
$205,000
$225,000
$239,500
$187,500
$187,000
$150,000
$681,856
$642,966
$886,453
$1,018,425
$682,062
$680,353
$447,084
Private Company Median Valuation Multiples The following table presents median valuation multiples based on revenue ranges for all industries. Companies with sales under $1M tended to have the lowest Selling Price/EBIT and Selling Price/EBITDA multiples. In recent years, companies with sales over $5M tended to have the largest Selling Price/EBIT and Selling Price/EBITDA multiples. In recent years, companies with sales between $1M and $5 tended to have the lowest Selling Price/Revenue multiples. Median Valuation Multiples - All Industries Organized by Net Sales Range and Year Net Sales Range $0 - $1M >$1M - $5M >$5M $0 - $1M >$1M - $5M >$5M $0 - $1M >$1M - $5M >$5M
2003 MVIC/Net Sales 0.48 0.40 0.38 MVIC/EBIT 3.52 7.13 6.25 MVIC/EBITDA 3.80 7.16 6.24
2004
2005
2006
2007
2008
2009
2010
0.50 0.43 0.50
0.48 0.42 0.41
0.50 0.41 0.60
0.49 0.45 0.53
0.48 0.40 0.44
0.45 0.42 0.48
0.46 0.40 0.35
3.45 5.57 10.52
3.27 5.25 5.38
3.53 5.42 5.81
3.11 5.16 7.19
2.53 4.61 5.91
2.32 4.20 5.07
2.22 3.72 5.00
3.80 5.49 6.74
4.05 5.72 4.48
4.16 5.53 4.96
3.73 5.41 6.74
2.60 4.44 4.69
2.32 4.19 4.69
2.24 3.70 3.63
Menden & Menden’s quarterly update provides you with a trusted outlook for the U.S. economy and trends in private M&A deal pricing. Menden & Menden is a full service investment banking firm specializing in business sales and divestures, buy side advisory, and private placements of equity and mezzanine capital. With offices in Portland, OR, San Francisco, Chicago, New York, London and Paris, we bring real world experience to provide you with global expert solutions.
1
Menden and Menden’s Quarterly Update
The next table and the accompanying graph presents median valuation multiples based on major industry groups, as identified by SIC code. Median Selling Price/Net Sales By Industry for all Net Sales Ranges SIC
Industry
2003
2004
2005
2006
2007
2008
2009
2010
1521-1799
Construction
0.32
0.34
0.43
0.38
0.42
0.39
0.39
0.35
2011-3999
Manufacturing
0.58
0.66
0.61
0.58
0.65
0.53
0.59
0.54
4011-4971
Transportation, Communications, Electric, Gas & Sanitary
0.44
0.51
0.55
0.68
0.62
0.69
0.43
0.58
5012-5199
Wholesale Trade
0.35
0.41
0.42
0.40
0.42
0.46
0.45
0.52
5211-5999
Retail Trade
0.34
0.38
0.40
0.42
0.39
0.36
0.33
0.33
7011-9999
Services
0.61
0.59
0.57
0.57
0.58
0.56
0.53
0.56
1521-9999
All Industries
0.45
0.47
0.47
0.49
0.48
0.46
0.44
0.44
Median Selling Price/Net Sales by Industry and Year for all Net Sales Ranges
Median Selling Price/Net Sales by Industry and Year for all Net Sales Ranges
0.7
Construction
Median Valuation Multiple
Manufacturing
0.6 Transportation, Communications, Electric, Gas & Sanitary Wholesale Trade
0.5
Retail Trade
Services
0.4
All Industries
0.3 2003
2004
2005
2006
2007
2008
2009
2010
2
Menden and Menden’s Quarterly Update
Economic Update at a Glance Economic reports from June indicate slow growth ahead. The Conference Board’s Leading Economic Index is pointing towards slow economic growth in the upcoming months. The Consumer Confidence Index dropped for the second consecutive month as fewer consumers see business and labor market conditions improving over the next six months. Unemployment increased for the second consecutive month and the number of jobs created in June was far below expectations, squashing hopes that the economic recovery will pick up speed. The Institute for Supply Management’s monthly manufacturing sector index finally increased after three consecutive monthly decreases, but the Institute’s services sector index declined. Some positive news was that consumer prices and ...consumer prices producer prices fell for the first time in 12 and producer prices months, while retail sales increased slightly. fell for the first time Both housing starts and building permit in 12 months... authorizations climbed in June, but home sales
remained weak. The S&P 500 dropped 1.83% this month (for a year-to-date return of 5.01%). The 10-Year Treasury note increased 13 basis points to 3.18% (for a year-to-date decrease of 12 basis points). Economic Forecast Consensus Economics, Inc., publisher of Consensus Forecasts - USA, reports that the consensus of U.S. forecasters believes real GDP will increase at a seasonally adjusted annual rate of 3.2% in the third quarter of 2011 and 3.3% in the fourth quarter. Every month, Consensus Economics surveys a panel of 28 prominent U.S. economic and financial forecasters (the “forecasters”) for their predictions on a range of variables including future growth, inflation, current account and budget balances, and interest rates. The forecasters expect GDP to grow 2.5% in 2011, 3.1% in 2012, and 3.3% in 2013. In the long term, they report that real GDP will grow by an average annual rate of 2.5% between 2017 and 2021. The forecasters believe unemployment will average 8.8% in the third quarter of 2011 and 8.7% in the fourth. They
Key Economic Variables Actual 2004-2010 and Forecast 2011-2021
EXHIBIT 2: Key Economic Variables Actual 2004‐2010 and Forecast 2011‐2021
6.0 4.0 2.0
Percent per year
0.0 ‐2.0 Real GDP*
‐4.0
Industrial Production*
‐6.0
Personal Consumption*
‐8.0
Consumer Prices*
‐10.0 ‐12.0
Source of historical data: U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau and The Federal Reserve Board. Source of forecasts: Consensus Forecasts.
Copyright © 2010 Business Valuation Resources, LLC (503) 291-7963. All rights reserved.
3
Menden and Menden’s Quarterly Update
believe unemployment will average 8.8% for all of 2011 and 8.3% for 2012.
2011, respectively. They expect personal consumption to increase 2.7% in 2011 and 2012.
The forecasters believe the 3-Month Treasury Bill rate will be 0.1% at the end of the third quarter of 2011 and 0.2% at the end of the fourth. They believe the rate will be 1.5% at the end of 2012. They forecast that the 10-Year Treasury Bond yield will be 3.4% and 3.7% at the end of the third and fourth quarter of 2011, respectively. They believe the 10-Year Treasury Bond yield will rise to 4.2% at the end of 2012.
The forecasters expect industrial production to increase at a rate of 5.1% in the third quarter of 2011 and 4.5% in the fourth. They forecast industrial production will increase 4.5% in 2011 and 4.0% in 2012.
They also believe consumer prices will rise at a rate of 2.2% and 1.9% in the third and fourth quarter, respectively. They expect consumer prices to increase 3.0% in 2011 and 2.1% in 2012. They expect producer prices to increase at a rate of 1.3% in the third quarter 1.4% in the fourth. The forecasters anticipate producer prices will rise 6.0% in 2011 and 1.8% in 2012.
The Energy Information Administration (EIA) predicts that the West Texas Intermediate (WTI) crude oil spot price will average approximately $101.91 per barrel in 2011 and $107.00 per barrel in 2012, up from $79.40 in 2010. The EIA expects regular retail gas prices to average $3.60 per gallon in 2011 and $3.67 per gallon in 2012, up from $2.78 in 2010.
The forecasters in the survey believe real disposable personal income will increase at a seasonally adjusted annual rate of 2.3% in the third quarter of 2011, before increasing at a rate of 2.9% in the fourth quarter. They believe real disposable personal income will increase 1.7% in 2011 and 2.1% in 2012. They forecast personal consumption will increase at a rate of 3.0% and 3.1% in the third and fourth quarter of
Nominal pre-tax corporate profits will be 7.7% and 5.9% in 2011 and 2012, respectively, according to the forecasters.
The EIA believes the Henry Hub natural gas spot price will average $4.25 per million Btu (MMBtu) in 2011 and $4.58 per MMBtu in 2012, compared with $4.39 per MMBtu in 2010. Residential electric prices, which averaged 11.58 cents per kilowatt-hour (kWh) in 2010, are expected to average 11.83 cents per kWh in 2011 and 11.84 cents per kWh in 2012.
Real Gross Domestic Product 1Q 2007 ‐ 2Q 2011 5.0% 3.0%
Annual Growth Rate
1.0% ‐1.0% ‐3.0% ‐5.0% ‐7.0% ‐9.0%
Source of data: U.S. Department of Commerce. Note: Figures are seasonally adjusted at annual rates.
4 Copyright © 2010 Business Valuation Resources, LLC (503) 291-7963. All rights reserved.
Using Transactional Databases for M&A In pricing and structuring M&A transactions, it is helpful to know how other completed M&A transactions have been priced and structured. In recent years, online databases have become available covering details of thousands of M&A transactions. The idea behind using transaction databases is to relate the price paid in other transactions in the industry to the respective company’s underlying financial data. The results of this research are called “valuation multiples,” which then can be applied to the target company’s underlying financial data to develop indications of value.
Checklist for Using Transaction Databases for Pricing and Valuation • Specify the parameters of the search. • Industry: Specify a Standard Industrial Classification (SIC) code and/or North American Industry Classification System (NAICS) code or a range of codes • Time frame: Specify a beginning and ending date • Size: Specify a range of size as measured by deal value, equity value, sales assets, earnings before interest, taxes, depreciation, and amortization (EBITDA), earnings before interest and taxes (EBIT), gross cash flow, earnings before taxes, net income (all of these not available for all databases) • Specify the database(s) to be included in the initial search • Query as to number of transactions meeting the criteria in each selected database • If not enough transactions, broaden one or more criteria and query again • If too many transactions, narrow one or more criteria and query again • Before making a final selection of transactions to use, view on the computer screen or print out the details of each transaction under consideration. (Transaction reports available for each database are presented later in the article.) • By examining the transaction details, the analyst may want to eliminate some for various reasons. • Company description not compatible • Valuation multiples not meaningful • Complicated transaction structure • Select which valuation multiples are most meaningful for the subject • Prepare a table of valuation multiples • Select multiples to apply to the subject company’s fundamental data • Prepare a valuation table • It is not necessary to use both an equity and an invested-capital procedure. If you use both, there will be a range of indicated value, which may be satisfactory for some purposes, such as fairness opinions. If it is necessary to develop a point estimate, it will be necessary to reconcile the estimates, choosing one or the other or some point in between. Menden & Menden . 1000 SW Broadway, Suite 1200 Portland, OR 97205 . (503) 555-1234 . www.mendenwebsite.com
Menden & Menden This newsletter is a publication of Menden & Menden. We provide a wide range of business and financial services including the valuation of businesses, business ownership interests, intangible assets, and financial litigation support. For further information on experience and capabilities, or for additional copies of this newsletter, please contact us today.
1000 SW Broadway, Suite 1200 Portland, OR 97205 (503) 555-1234 www.mendenwebsite.com
Summer 2011
Powered by:
4Q 2011
Quarterly Private Deal & Economic Outlook Update Menden & Menden is proud to introduce the Quarterly Private Deal & Economic Outlook Update for financial professionals. Powered by Business Valuation Resources robust data offerings, this report is your trusted outlook for the trends in private M&A deal pricing and the U.S. economy. The Pratt’s Stats® data indicates that, in recent years, larger companies tended to have larger Selling Price/ EBIT and Selling Price/EBITDA multiples than smaller companies. In other words, as a percentage of EBIT and EBITDA, larger companies tended to sell for more than smaller companies. Over the years, the retail trade, wholesale trade and construction sectors tended to sell for less than the “All Industries” benchmark, while the manufacturing, services, transportation, communications, electric gas and sanitary sectors tended to sell for a premium to the “All Industries” benchmark. Economic reports indicate slow growth ahead. The Consumer Confidence Index dropped for the second consecutive month as fewer consumers see business and labor market conditions improving over the next six months. Some positive news was that consumer prices and producer prices fell for the first time in 12 months, while retail sales increased slightly. Both housing starts and building permit authorizations climbed in June, but home sales remained weak. The S&P 500 dropped 1.83% this month (for a year-to-date return of 5.01%). The 10-Year Treasury note increased 13 basis points to 3.18% (for a year-to-date decrease of 12 basis points). This newsletter is a publication of Menden & Menden. We provide a wide range of business and financial services including the valuation of businesses, business ownership interests, intangible assets, and financial litigation support. For further information on experience and capabilities, or for additional copies of this newsletter, please contact us today.
John Smith, Partner Menden & Menden (503) 555-1234
The Economy Appears Poised For Slow Growth, And Many Private Company Valuations Remain Down From Their Peak Private Deal Update The below table provides summary information on the transactions that will be analyzed for the following tables and graph. The data set was provided by Pratt’s Stats®, an online database containing full transaction details on more than 17,000 sold private businesses that were acquired by private or public buyers. For the purposes of our analysis, we will only use those transactions where the buyer was private. Summary Information (private buyers only) 2003 Count 701 Median $449,596 Revenue Average $1,302,753 Revenue Median $200,000 Selling Price Average $589,046 Selling Price
2004
2005
2006
2007
2008
2009
2010
938
1,025
1,029
1,145
1,434
920
848
$448,119
$448,318
$490,000
$500,077
$440,906
$456,270
$390,770
$1,145,455
$1,292,285
$1,428,820
$2,566,962
$1,209,800
$1,500,879
$956,737
$200,000
$205,000
$225,000
$239,500
$187,500
$187,000
$150,000
$681,856
$642,966
$886,453
$1,018,425
$682,062
$680,353
$447,084
Private Company Median Valuation Multiples The following table presents median valuation multiples based on revenue ranges for all industries. Companies with sales under $1M tended to have the lowest Selling Price/EBIT and Selling Price/EBITDA multiples. In recent years, companies with sales over $5M tended to have the largest Selling Price/EBIT and Selling Price/EBITDA multiples. In recent years, companies with sales between $1M and $5 tended to have the lowest Selling Price/Revenue multiples. Median Valuation Multiples - All Industries Organized by Net Sales Range and Year Net Sales Range $0 - $1M >$1M - $5M >$5M $0 - $1M >$1M - $5M >$5M $0 - $1M >$1M - $5M >$5M
2003 MVIC/Net Sales 0.48 0.40 0.38 MVIC/EBIT 3.52 7.13 6.25 MVIC/EBITDA 3.80 7.16 6.24
2004
2005
2006
2007
2008
2009
2010
0.50 0.43 0.50
0.48 0.42 0.41
0.50 0.41 0.60
0.49 0.45 0.53
0.48 0.40 0.44
0.45 0.42 0.48
0.46 0.40 0.35
3.45 5.57 10.52
3.27 5.25 5.38
3.53 5.42 5.81
3.11 5.16 7.19
2.53 4.61 5.91
2.32 4.20 5.07
2.22 3.72 5.00
3.80 5.49 6.74
4.05 5.72 4.48
4.16 5.53 4.96
3.73 5.41 6.74
2.60 4.44 4.69
2.32 4.19 4.69
2.24 3.70 3.63
Menden & Menden’s quarterly update provides you with a trusted outlook for the U.S. economy and trends in private M&A deal pricing. Menden & Menden is a full service investment banking firm specializing in business sales and divestures, buy side advisory, and private placements of equity and mezzanine capital. With offices in Portland, OR, San Francisco, Chicago, New York, London and Paris, we bring real world experience to provide you with global expert solutions.
1
Menden and Menden’s Quarterly Update
The next table and the accompanying graph presents median valuation multiples based on major industry groups, as identified by SIC code. Median Selling Price/Net Sales By Industry for all Net Sales Ranges SIC
Industry
2003
2004
2005
2006
2007
2008
2009
2010
1521-1799
Construction
0.32
0.34
0.43
0.38
0.42
0.39
0.39
0.35
2011-3999
Manufacturing
0.58
0.66
0.61
0.58
0.65
0.53
0.59
0.54
4011-4971
Transportation, Communications, Electric, Gas & Sanitary
0.44
0.51
0.55
0.68
0.62
0.69
0.43
0.58
5012-5199
Wholesale Trade
0.35
0.41
0.42
0.40
0.42
0.46
0.45
0.52
5211-5999
Retail Trade
0.34
0.38
0.40
0.42
0.39
0.36
0.33
0.33
7011-9999
Services
0.61
0.59
0.57
0.57
0.58
0.56
0.53
0.56
1521-9999
All Industries
0.45
0.47
0.47
0.49
0.48
0.46
0.44
0.44
Median Selling Price/Net Sales by Industry and Year for all Net Sales Ranges
Median Selling Price/Net Sales by Industry and Year for all Net Sales Ranges
0.7
Construction
Median Valuation Multiple
Manufacturing
0.6 Transportation, Communications, Electric, Gas & Sanitary Wholesale Trade
0.5
Retail Trade
Services
0.4
All Industries
0.3 2003
2004
2005
2006
2007
2008
2009
2010
2
Menden and Menden’s Quarterly Update
Economic Update at a Glance Economic reports from June indicate slow growth ahead. The Conference Board’s Leading Economic Index is pointing towards slow economic growth in the upcoming months. The Consumer Confidence Index dropped for the second consecutive month as fewer consumers see business and labor market conditions improving over the next six months. Unemployment increased for the second consecutive month and the number of jobs created in June was far below expectations, squashing hopes that the economic recovery will pick up speed. The Institute for Supply Management’s monthly manufacturing sector index finally increased after three consecutive monthly decreases, but the Institute’s services sector index declined. Some positive news was that consumer prices and ...consumer prices producer prices fell for the first time in 12 and producer prices months, while retail sales increased slightly. fell for the first time Both housing starts and building permit in 12 months... authorizations climbed in June, but home sales
remained weak. The S&P 500 dropped 1.83% this month (for a year-to-date return of 5.01%). The 10-Year Treasury note increased 13 basis points to 3.18% (for a year-to-date decrease of 12 basis points). Economic Forecast Consensus Economics, Inc., publisher of Consensus Forecasts - USA, reports that the consensus of U.S. forecasters believes real GDP will increase at a seasonally adjusted annual rate of 3.2% in the third quarter of 2011 and 3.3% in the fourth quarter. Every month, Consensus Economics surveys a panel of 28 prominent U.S. economic and financial forecasters (the “forecasters”) for their predictions on a range of variables including future growth, inflation, current account and budget balances, and interest rates. The forecasters expect GDP to grow 2.5% in 2011, 3.1% in 2012, and 3.3% in 2013. In the long term, they report that real GDP will grow by an average annual rate of 2.5% between 2017 and 2021. The forecasters believe unemployment will average 8.8% in the third quarter of 2011 and 8.7% in the fourth. They
Key Economic Variables Actual 2004-2010 and Forecast 2011-2021
EXHIBIT 2: Key Economic Variables Actual 2004‐2010 and Forecast 2011‐2021
6.0 4.0 2.0
Percent per year
0.0 ‐2.0 Real GDP*
‐4.0
Industrial Production*
‐6.0
Personal Consumption*
‐8.0
Consumer Prices*
‐10.0 ‐12.0
Source of historical data: U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau and The Federal Reserve Board. Source of forecasts: Consensus Forecasts.
Copyright © 2010 Business Valuation Resources, LLC (503) 291-7963. All rights reserved.
3
Menden and Menden’s Quarterly Update
believe unemployment will average 8.8% for all of 2011 and 8.3% for 2012.
2011, respectively. They expect personal consumption to increase 2.7% in 2011 and 2012.
The forecasters believe the 3-Month Treasury Bill rate will be 0.1% at the end of the third quarter of 2011 and 0.2% at the end of the fourth. They believe the rate will be 1.5% at the end of 2012. They forecast that the 10-Year Treasury Bond yield will be 3.4% and 3.7% at the end of the third and fourth quarter of 2011, respectively. They believe the 10-Year Treasury Bond yield will rise to 4.2% at the end of 2012.
The forecasters expect industrial production to increase at a rate of 5.1% in the third quarter of 2011 and 4.5% in the fourth. They forecast industrial production will increase 4.5% in 2011 and 4.0% in 2012.
They also believe consumer prices will rise at a rate of 2.2% and 1.9% in the third and fourth quarter, respectively. They expect consumer prices to increase 3.0% in 2011 and 2.1% in 2012. They expect producer prices to increase at a rate of 1.3% in the third quarter 1.4% in the fourth. The forecasters anticipate producer prices will rise 6.0% in 2011 and 1.8% in 2012.
The Energy Information Administration (EIA) predicts that the West Texas Intermediate (WTI) crude oil spot price will average approximately $101.91 per barrel in 2011 and $107.00 per barrel in 2012, up from $79.40 in 2010. The EIA expects regular retail gas prices to average $3.60 per gallon in 2011 and $3.67 per gallon in 2012, up from $2.78 in 2010.
The forecasters in the survey believe real disposable personal income will increase at a seasonally adjusted annual rate of 2.3% in the third quarter of 2011, before increasing at a rate of 2.9% in the fourth quarter. They believe real disposable personal income will increase 1.7% in 2011 and 2.1% in 2012. They forecast personal consumption will increase at a rate of 3.0% and 3.1% in the third and fourth quarter of
Nominal pre-tax corporate profits will be 7.7% and 5.9% in 2011 and 2012, respectively, according to the forecasters.
The EIA believes the Henry Hub natural gas spot price will average $4.25 per million Btu (MMBtu) in 2011 and $4.58 per MMBtu in 2012, compared with $4.39 per MMBtu in 2010. Residential electric prices, which averaged 11.58 cents per kilowatt-hour (kWh) in 2010, are expected to average 11.83 cents per kWh in 2011 and 11.84 cents per kWh in 2012.
Real Gross Domestic Product 1Q 2007 ‐ 2Q 2011 5.0% 3.0%
Annual Growth Rate
1.0% ‐1.0% ‐3.0% ‐5.0% ‐7.0% ‐9.0%
Source of data: U.S. Department of Commerce. Note: Figures are seasonally adjusted at annual rates.
4 Copyright © 2010 Business Valuation Resources, LLC (503) 291-7963. All rights reserved.
Using Transactional Databases for M&A In pricing and structuring M&A transactions, it is helpful to know how other completed M&A transactions have been priced and structured. In recent years, online databases have become available covering details of thousands of M&A transactions. The idea behind using transaction databases is to relate the price paid in other transactions in the industry to the respective company’s underlying financial data. The results of this research are called “valuation multiples,” which then can be applied to the target company’s underlying financial data to develop indications of value.
Checklist for Using Transaction Databases for Pricing and Valuation • Specify the parameters of the search. • Industry: Specify a Standard Industrial Classification (SIC) code and/or North American Industry Classification System (NAICS) code or a range of codes • Time frame: Specify a beginning and ending date • Size: Specify a range of size as measured by deal value, equity value, sales assets, earnings before interest, taxes, depreciation, and amortization (EBITDA), earnings before interest and taxes (EBIT), gross cash flow, earnings before taxes, net income (all of these not available for all databases) • Specify the database(s) to be included in the initial search • Query as to number of transactions meeting the criteria in each selected database • If not enough transactions, broaden one or more criteria and query again • If too many transactions, narrow one or more criteria and query again • Before making a final selection of transactions to use, view on the computer screen or print out the details of each transaction under consideration. (Transaction reports available for each database are presented later in the article.) • By examining the transaction details, the analyst may want to eliminate some for various reasons. • Company description not compatible • Valuation multiples not meaningful • Complicated transaction structure • Select which valuation multiples are most meaningful for the subject • Prepare a table of valuation multiples • Select multiples to apply to the subject company’s fundamental data • Prepare a valuation table • It is not necessary to use both an equity and an invested-capital procedure. If you use both, there will be a range of indicated value, which may be satisfactory for some purposes, such as fairness opinions. If it is necessary to develop a point estimate, it will be necessary to reconcile the estimates, choosing one or the other or some point in between. Menden & Menden . 1000 SW Broadway, Suite 1200 Portland, OR 97205 . (503) 555-1234 . www.mendenwebsite.com
Menden & Menden This newsletter is a publication of Menden & Menden. We provide a wide range of business and financial services including the valuation of businesses, business ownership interests, intangible assets, and financial litigation support. For further information on experience and capabilities, or for additional copies of this newsletter, please contact us today.
1000 SW Broadway, Suite 1200 Portland, OR 97205 (503) 555-1234 www.mendenwebsite.com
