We can learn a lot from history. Of course, we have to pay attention and allow for other factors. One area that especially requires special attention is the pricing of a business and the relationship between current pricing and comparable sales information from pre-Great Recession.
My opinion is that if the business being evaluated has done well during the recession the comparable statistics are acceptable. However, if the business has suffered, it’s tough to make a valid comparison with deals from less turbulent times. This means that businesses that have had a rough three to four years are hit with a double whammy. Their earnings are down and their multiple of earnings factor will also be lower.
One other issue to consider is the use of average selling prices. I’ve had discussions with many people about the validity of (historical) average selling prices. Rarely will a business be average. Don’t get caught in the trap of using averages as gospel.
Toby Tatum, Certified Business Appraiser and the author of Transaction Patterns recently wrote my “Partner” On-Call Network associate Ted Leverette and said, “Using a 3X multiple of Seller’s Discretionary Earnings (owner salary plus EBITDA in most cases) for the vast majority of businesses represented in the Bizcomps database will tend to yield a value conclusion that is approximately double the correct amount.”
Or, a small percentage of good businesses are raising the average price of all the others. So be careful.
“It’s always a good time to buy a business” Richard Parker
