Valuing Businesses Using Regression Analysis

A Quantitative Approach to the Guideline Company Transaction Method

C. Fred Hall, III

• Publisher: Wiley
• Year: 2021
• Print ISBN: 9781119793427
• eBook ISBN: 9781119793434
• Edition: 1
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

Demystifies regression-based valuation through simple explanations, easy-to-understand charts, and time-saving bonus resources

Current methodologies using median, quartiles, or standard deviations to calculate revenue multipliers and cash flow multipliers often produce values that are wildly divergent. This forces the appraiser to choose between a very high or a very low value or consider averaging the values, opening the possibility for the appraiser to be challenged. On the surface, regression analysis appears to be the more complex, mathematical model, so many professionals shy away from using it out of fear that readers will be confused and reject the results of the appraisal. Valuing Businesses Using Regression Analysis solves this issue by breaking down regression to its simplest terms and providing easy-to-read charts and explanations that can be understood by all.

Since regression analysis does not come pre-installed in Excel, this book will show you how to enable Excel's regression in your computer. Then you'll learn four different Regression tools that can be used for business valuations or for forecasting in general. As an added perk, this book also comes with a template that simplifies the entire regression methodology into the click of one button. With a minimal amount of work, you can use this template to produce a compelling four-page valuation report.

• See why current valuation methodologies can be wildly inaccurateand why regression analysis is a practical and preferable alternative
• Learn how to set up Regression in Excel and use single-variable linear regression to predict revenue and cash flow multipliers
• Walk through the process for conducting more advanced analyses, including curved regression with outliers and multiple variable regression
• Use the bonus template to create attractive four-page valuation reports using regression analysis in Excel

This book is an excellent choice for valuators and other financial professionals ready to take the leap into regression analysis for more accurate, more objective business valuations.

CHAPTER 1
Current Methodologies

The Guideline Company Transaction Method is a subset of the Market Approach and is a sister to the Guideline Public Company Method. The two methods are characterized by the transactional databases used in the calculation of value. The Guideline Public Company Method uses various SEC (Securities and Exchange Commission) data of publicly traded companies that have been acquired by other publicly traded companies. This method is obviously used to value large‐sized publicly traded corporations. The Guideline Company Transaction Method, which will be used in this book, references a number of subscription‐based databases that have recorded the sales of small privately owned companies. The data from those transactions is compared to the subject company in order to draw a conclusion of its value.

The focus of the regression methodology being presented is primarily on companies with revenue less than $5 million. Most of those transactions have been handled by main street business brokers. Most of these business brokers have been schooled by the IBBA (International Business Brokers Association) and therefore, present the transactional data using the same format. As companies increase in size, especially those with revenues greater than $10 million, M&A specialists (mergers and acquisitions) are the more common sales agents. These larger companies are referred to as middle‐market businesses—bigger than main street but smaller than Wall Street. The M&A professionals analyze financial statements differently than main street brokers. For the most part they use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a measure of earnings rather than SDE (Seller's Discretionary Earnings). The two values are significantly different as are the rules to calculate them.

The terms Seller's Discretionary Earnings (SDE) and cash flow will be used interchangeably throughout this book.

There are several transactional databases available that concentrate on the smaller main street businesses. The four databases referenced in this book are:

1. DealStats (formerly Pratt's Stats) has over 30,000 transactions. The median revenue of all the transactions is $750,000. 75% generated less than $3,500,000 in revenue. Most of the data is obtained from business broker submissions. However, for many of the larger transactions the data was harvested from SEC filings of 8‐K quarterly financial reports. The database is owned and managed by Business Valuation Resources, LLC, Portland, Oregon.
2. Bizcomps^® has over 14,000 transactions with a median revenue of $455,000. 75% generated less than $915,000 in revenue. All the transactional data is obtained from broker submissions. The database ...

Table of contents

• Cover
• Table of Contents
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• CHAPTER 1: Current Methodologies
• CHAPTER 2: The Solution
• CHAPTER 3: Identifying Outliers Using Regression
• CHAPTER 4: Cash Flow Multiplier Regression
• CHAPTER 5: Enterprise Multiplier
• CHAPTER 6: Polynomial Regressions
• CHAPTER 7: Multiple Variable Regression
• CHAPTER 8: Selection of Transactions in the Sample
• CHAPTER 9: Regression 2.0
• CHAPTER 10: Using Excel's Regression Utility
• CHAPTER 11: Excel Valuation Template
• CHAPTER 12: Conclusion
• About the Website
• Index
• End User License Agreement