Question

Should comparable market transactions be used for a notional business valuation?

Answer
By Ian Campbell | Last updated: February 23, 2021

I have some very specific, long-held and unchanged views on this matter. Simply put, I believe that unless the person using a comparable has been actively involved in the transaction that gave rise to the comparable, understands the transaction nuances and what went on through the negotiation process, understands the business being purchased and the business that is purchasing it in the contexts of operating and other post-transaction synergies, that comparables are nothing more or less than possible indicators of value in any given fact situation.

A principle problem with using comparables, aside from typically knowing only publicly available information about the businesses and transactions that give rise to them, is that a comparable transaction that is an acquisition of a business in a similar industry or the same industry may include post-acquisition synergies that were paid for in the price. For that matter, there also may be post-acquisition synergies in the transaction that aren’t accounted for in the price because no one was successful in negotiating for them.

So I have great difficulty with anyone who says, I've got eight comparables here and the average multiple derived on the eight comparables is X. I am going to apply this multiple of X to the stream of cash flow that I'm looking at as a principal valuation methodology. While some comparables may provide possible value indicators, in my view no one should base a business valuation opinion purely on comparables.

Share this Q&A

  • Facebook
  • LinkedIn
  • Twitter

Tags

Valuation Valuation Methods Enterprise Value

Written by Ian Campbell

Profile Picture of Ian Campbell

Ian R. Campbell, FCPA, FCA, FCBV is the president of Business Transition Counsel Inc. and the author of 50 Hurdles: Business Transition Simplified.

Ian is one of the most distinguished and recognized business valuators in North America. He has been instrumental in developing the practice of business valuation consulting in Canada through participating in the founding of the Canadian Institute of Chartered Business Valuators, lecturing and writing.

More Q&As from our experts

Related Articles

Term of the Day

Notional Value

Notional value is defined as the total net amount of forward contracts or the leveraged investments based on realistic spot...
Read Full Term

Subscribe To the Divestopedia Newsletter!

Stay on top of new content from Divestopedia.com. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.

Resources
Go back to top