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