Private firms linger longer on the selling block

Dear Clients and Colleagues:

It’s taking longer for private companies to sell and this could have an impact on Marketability Discounts.

A newly updated analysis of data from BVR’s Pratt’s Stats reveals that the time needed to market and sell a privately held business is 211 days, up from 200 days in the previous analysis.

The latest annual update of an ongoing study, Marketing Period of Private Sales Transactions, examines a database of 7,928 private company sale transactions from BVR’s Pratt’s Stats database. The population of the transactions occurred from February 1992 through the end of 2011.

The business valuation concept of marketability deals with the liquidity of the ownership interest; that is how quickly and with what certainty an owner can convert an investment to cash. It is appropriate in the valuation of most privately held businesses to discount the total enterprise value for this lack of liquidity in order to arrive at the company’s fair market value.

The uncertainty involved with liquidity is reflected in business valuations by the Discount for Lack of Marketability (DLOM). The DLOM can be substantial, ranging at times from 30% – 40%, and many factors contribute independently to its determination.

At Stevenson Valuation Group we explore and have experience in analyzing the key contributors to Marketability. For more information, please contact us.

If you have any questions about this article, please don’t hesitate to contact me.

Sincerely,

Thomas G Stevenson, CPA, CVA

Advertisements

Building Value is a Process–Part Three

Under the Income Approach to valuation, maximizing value becomes a function of increasing net cash flow , decreasing an investor’s perception of risk or a combination of both.  Last month we discussed various ways to increase net flow and this month we’ll review various ways to reduce investor’s risk.  In valuation terms, investor’s risk is also referred to as an investor’s required rate of return or, capitalization rate, and it is expressed as a percentage.

A key component in determining the value of a going concern is the strength and transferability of the business’ cash flow.  An investor is likely to pay more for a cash flow that’s predictable than one that is subject to various internal and/or external sources of risk. 

The general rule of thumb is “the lower the risk the higher the value.” 

Below is a sample of some of the factors we commonly consider when evaluating the strength and transferability of cash flow.       

·         Company operating history and volatility of cash flow

·         Depth and quality of management

·         Competition and barriers to entry

·         Access to capital resources

·         Reliance on key person(s)

·         Size and geographic diversification

·         Concentration in customer base

·         Market resources in light of competition

·         Purchasing power and other economies of scale

·         Product and market development resources

·         Technological obsolescence

·         Reliance on vendors

·         Distribution system

·         Financial reporting and controls

·         Long term contracts with customers or unique products or

            market niche

·         Patents, copyrights, franchise rights, proprietary products

·         Operating facilities and capital investment needs

·         Industry and economic conditions

Broadly speaking, capitalization rates range from 17% at the low risk end of the spectrum to over 30% at the high end of the spectrum.  

By working with management, Stevenson Valuation Group has, over time, assisted management in increasing value by enhancing the quality of the company’s cash flow.