IS DETAILED AND VERIFIED BUSINESS SALE PRICE DATA IMPORTANT?
Comparable Small Business Sale Prices Are Not Reliable.
Brokers and other business valuators seem to believe in the John Chretien quote.
“A proof is a proof. What kind of a proof? It's a proof. A proof is a proof. And when you have a
good proof, it's because it's proven”.
-Jean Chretien
“There are three types of lies -- lies, damn lies, and statistics.”
-Benjamin Disraeli
Without a meaningful way to calculate intangible assets, valuers typically take another easy way out. They buy data from data brokers and render it into what they call “Comparable Business Sale Prices”.
I believe the sale price data they buy is not incorrect but in most cases is inadequate in depth to suggest the comparable business is actually comparable.
I am not suggesting business sale price data is incorrect. My concern is the lack of intangible asset depth in the data collected, and the way valuators use business sale price data without knowing if the intangible asset components are truly comparable.
Let me know how can I help you.
NOTE HOW THE INFORMATION GATHERING DIFFERS BETWEEN 25 FACTORS AND THE INFORMATION GENERALLY AVAILABLE IN THE COMPARABLE SALE PRICE DATA THAT IS BEING SOLD. |
|
---|---|
25 Factors Methodology |
Regularly Offered Comparable Sale Price Data |
Purpose |
Purpose
|
History |
History |
Financials |
Financials |
Return on Investment (ROI) |
Return on Investment (ROI) |
Liquidity |
Liquidity |
Cost of Liquidation |
Cost of Liquidation |
Hard Assets |
Hard Assets |
Utility, Sustainability, and Scalability |
Utility, Sustainability, and Scalability |
Research & Development (R&D) |
Research & Development (R&D) |
Processes, Procedures, Systems, and Documentation |
Processes, Procedures, Systems, and Documentation |
Shareholder Agreement |
Shareholder Agreement |
Management Capability, Workforce, and Intellectual Property |
Management Capability, Workforce, and Intellectual Property |
Client Base |
Client Base |
Supply Chain |
Supply Chain |
Distribution Network |
Distribution Network |
Marketing (Advertising, PR, Brand & Crypto Promotion) |
Marketing (Advertising, PR, Brand & Crypto Promotion) |
Dominance in the market |
Dominance in the market |
Industry benchmarks (averages) |
Industry benchmarks (averages) |
Terms of lease |
Terms of lease |
Terms of Sale |
Terms of Sale |
Minority Interest |
Minority Interest |
Special Interest Purchaser |
Special Interest Purchaser |
Geopolitical considerations |
Geopolitical considerations |
Risk |
Risk |
Opportunity |
Opportunity |
We have additional damning information that was sent to us that shows the inadequate quality of the sale price data that is being sold to the business valuation industry worldwide. Even a video. Available to a court upon request.
Comparable Sales prices are legitimate factors when one is valuing tangible assets such as farm machinery, construction equipment, restaurant equipment, and residential housing in similar areas where there are many recent sales to use for price comparison. Unverified comparable sale prices for business valuations should never be used in an Income Tax Act compliant business valuation. The type of information a valuator would need to establish a true “comparable sale price” is usually very private information and I highly doubt families and private businesses would release it.
If you were comparing 6 oil and gas drilling companies each doing in the 10 Million dollar range a year in sales within the same geographic location and province or state with the same rules and regulation; then the comparisons between the public and private company could be similar and likely a good comparable. This is a far stretch from what the data sellers are offering.
If my client was facing one of the standard valuations produced by most of the current business valuators in Canada using unverified sale price data; this is the recommendation I would make to their lawyer.
WHY do the big multinational accounting firms and their followers like to use business sale price data in their valuations for private companies?
Because it is easy money.
Valuation firms buy the “comparable business sale price data”
They have accounting people with little or no business experience apply math formulas to the “sale data” they purchase and voila.
This is how many business valuation prices are derived.
Comparable Sale Price adequacy in 1975 might have been acceptable, but certainly not in 2021.
The Bottom Line:
“Comparable Sale Prices” must honestly be “comparable”
CRA could drive a truck through a valuation based on incomplete, non verified data
without depth. Clients should not want to be there.
DO AUCTIONEERS UNDERSTAND FAIR MARKET VALUE?
CPPA and Auctioneers.
CPPA stands for Canadian Personal Property Appraiser. This group was formed by a group of mostly AUCTIONEERS back in 1995 so that they could have a formal and documented format to use that followed the Uniform Standards of Professional Appraisal Practices that could be accepted in court. Experience was the key factor. Most business people would agree that auctioneers know a lot more about real time, on the ground, tangible asset value, than any other group or profession. I personally held an auction license in the early 1980’s
Nobody goes to the auction industry for tax advice.
Why would you go to your tax advisor to find fair market value on used equipment?