Private transaction databases ("PTDs") are databases on the sales of private companies. These databases usually have basic information on the sales, such as purchase price, last fiscal year revenues and earnings, last fiscal year balance sheet, industry and sale date. This data is normally derived from submissions by business brokers, investment bankers or from SEC filings.
Some of these PTDs are Pratt's StatsTM BIZCOMPS®, DoneDeals® and the Institute of Business Appraisers (IBA) database.
The Pratt's Stats database, as of January 2015, contained details on about 22,000 transactions from 1990 to 2015, with deal prices from under $1 million to $17.5 billion. Transactions are segregated into 805 SIC codes.
BIZCOMPS® databases contain 13,061 transactions sorted by SIC, keywords, annual gross revenue, sale date, sale price and location.
The DoneDeals® database has private and public mid-market transactions with purchase prices between $1 million and $1 billion. It reports that it has up to 1,000 deals reported on annually.
The IBA database is the largest at over 37,000 sales of closely-held businesses in more than 780 SIC codes. Businesses are mostly small and mid-sized. The database is free to IBA members.
At first blush, it would appear that the use of these PTDs is an excellent method of determining the value of closely-held businesses, especially for 100% interests. The databases provide means of searching the data by industry, size, date of sale and many other data points. However, these PTDs are not without their limitations.
First, PTDs typically only have data from the last fiscal year. This is a major drawback in that it is impossible to derive a trend in earnings from one year of data. Since expected growth is a major component in the valuation of a business, one cannot determine if the chosen market multiple is high or low due to variations in growth expectations.
Second, without the ability to fully analyze the historical financial statements of the businesses in the PTDs it is impossible to assess the risk associated with the business. As with growth, risk is a major component in the valuation of a business.
Lastly, the limited data associated with PTDs prevents the business appraiser from knowing the overall circumstances surrounding the transaction. Was the buyer a strategic buyer or an investment buyer? Were there any contingent assets or liabilities not reflected in the financial statements? Is there a “key man” that the business relies on? What is the level of competition? Are there new products on the horizon? The list goes on and on. Without access to management, the business appraiser cannot consider any of these factors that could substantially affect the market multiple of the transaction.
Conclusion
For these reasons, in most circumstances, data from PTDs should only be used as a cross-check on values derived from other methods. Data from PTDs is especially useful when there are many transactions in the same industry as the subject company, as then averages and medians become more meaningful.
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