Why don’t business appraisals include active listings as comparable sales?

Appraisals|4–5 MIN READ

Why don’t business appraisals include active listings as comparable sales?

by Brad Roberson

OK, OK, calm down. I admit the title was designed to get your attention, since it’s a seemingly simple answer. Any business appraiser worth their credential has seen and understands the definition of Revenue Ruling 59-60. I will eventually know it by heart once I have as much practice as some of you gray-haired fellows. If the definition of fair market value is “the amount at which the property would change hands between a willing buyer and willing seller…” then it obviously precludes an analysis of active listings since they’re missing the buyer … right?

Well, sure – if you’re strictly the academic type. I certainly was throughout my short career working at a major research university, running stochastic forecasting models of huge data sets and presenting my findings in multiple academic journals. But I left the PhD path and ventured out into the banking world … and eventually into the business brokerage world, where I found a totally different set of rules when working directly with buyers and sellers. They come to us wanting to know what’s happening (not what’s already happened) in the marketplace. Throughout the course of my banking/business brokerage career, I’ve also seen and reviewed a lot of commercial real estate appraisals that use active listings as comparable sales.

I imagine that at least a few people reading this are Business Certified Appraisers who also work in the business brokerage profession. We get a front row seat to a lot of different types of deals, of all shapes and sizes. We may also see a fair amount of deals that involve a willing buyer and seller, but for whatever reason don’t make it to the closing table (though hopefully we don’t see too many of those). Don’t those deals at least somewhat represent fair market value? Is incomplete data better than no data? Well, even if that data is useful, there’s no reliable source that aggregates it. Compiling it would be mostly fruitless (maybe even impossible) since LOIs and unconsummated purchase agreements are confidential in nature.

I also get lots of calls from buyers and sellers who desire to be in the marketplace, but aren’t quite ready yet. They simply want to know what their business is worth, today. Though the commonly-used Business Reference Guide’s “rules of thumb” can be helpful for understanding the nuances of how different types of businesses are bought and sold (based on a multiple of annual revenues plus inventory versus a multiple of annual SDE, for example), I don’t end there, especially if those rules of thumb report value ranges that are hundreds of thousands of dollars apart. I prefer to pull comparable sales from done-deal databases, after a rather in-depth analysis of the profit and loss statements and balance sheet. I make sure the deal cashflows enough to provide a good living and service debt under a typical SBA loan structure, and aggregate these findings into a defendable price we can take to the marketplace. Although it is just the first part of a long sales process with many twists and turns, this approach sets us up for success: we’ve closed over 90% of our deals at over 98% of asking price.

But what about all the other businesses for sale? Buyers have tens of thousands of listings to choose from on BizBuySell, just one of many business-for-sale websites. What happens if comparable listings are priced at a lower multiple than comparable sales? True, this doesn’t happen very often, but I’ve seen it a few times this year. I expect it to become more prevalent as more baby boomer business owners seek to sell their businesses: as the supply of businesses for sale increase, the deals must be sweeter to entice a limited buyer pool. If appraisers stick only to using historical sales data for determining fair market value, they’ll continue to be behind the market. This could be just fine for business appraisers who are strictly focused on just doing fee appraisals, their job is relatively easy in this case since historical data would most likely support a higher appraised value. But as a broker, if we fail to research what’s happening in the marketplace and price a listing based on sold comparables with higher multiples, we are wasting everyone’s time and doing our clients a disservice. The listing will sit for months with no activity until the price is eventually lowered to a more reasonable level. Even then, the seller won’t be happy with the outcome since we, as brokers, set price expectations too high from the beginning.

What’s the easiest way to check for comparables on BizBuySell? Many of us are experts at pulling data from BizComps, Pratts, or Peercomps, but don’t have access to the asking price valuation tool that’s available to paid subscribers to their Brokerworks platform. There is no way to separate businesses based on SIC or NAICS codes, and at first glance, BizBuySell’s selection tool can be frustrating to the average visitor. Although one cannot download the data sets, s/he can still bracket the results based on gross revenues or discretionary earnings (referred to as “cash flow” on BizBuySell). Here’s how. First, click the “advanced search” option on the bottom right side of the selection tool on the home page:

Then, click “More Search Options” on the bottom left side of the selection tool:

Input the desired revenue/SDE (cash flow) ranges in the areas provided, and be sure to choose the proper business category and geographic area.  BizBuySell defaults to your home state, so be sure to update it to include “ALL of US:”

After clicking the orange “Search Businesses” button, any businesses that fit the selected parameters will show up on the following page.  Although it’s a bit tedious, it’s relatively easy to input the data into a spreadsheet that sorts the data based on revenue/SDE multiples.  I’ve found that saving 5-10 examples as PDFs, which I then present to a prospective buyer or seller, is very helpful in building a case for current value, over and above what’s happened historically.

Hopefully this article helps shed some light on how a broker/appraiser uses active listings to support fair market value.


This article will be published in the July 2018 edition of “The Valuation Report” from the International Society of Business Appraisers.

Published February 23, 2018

Topics: Appraisals

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