One of the most common sources of data for market multiples is the financial information of publicly traded companies in the same or similar industry as the target company. Public company data is readily available from various sources, such as financial websites, databases, reports, and filings. However, public company data may not always be comparable to the target company, as public companies may have different sizes, growth rates, risk profiles, capital structures, and accounting policies. Therefore, you need to select the most relevant public companies based on their business activities, geographic markets, and financial performance, and adjust their multiples for any significant differences.
When setting acquisition price multiples, it is easy to fall prey to the siren song of public company data because of its easy availability. However, public company data is generally not relevant or applicable to acquisitions of privately-owned businesses because public companies are generally much larger and have different growth rates, risk profiles, capital structures, geographic market distribution and accounting policies (revenue and cost recognition). Adjusting public data for a private transaction is a heavily subjective process that may actually make the public data less - not more - reliable and comparable, and may increase the margin of error in the price multiple.
In our industry, market multiples can often be derived from a variety of sources. For instance, industry reports and publications provide valuable insights into comparable companies' performance metrics, which can then be used to calculate multiples. Additionally, financial databases and platforms offer access to extensive datasets, allowing for comprehensive analysis of market trends and competitor valuations. Moreover, networking within the industry and engaging with professionals can uncover valuable firsthand knowledge and perspectives on market multiples. Overall, leveraging a combination of these sources enables a more robust understanding of market dynamics and informs strategic decision-making processes.
Public company data is often misleading for private company valuations. While easily accessible, public company data doesn't account for the unique challenges and dynamics of private firms. As Warren Buffett says, "Beware the investment activity that produces applause; the great moves are usually greeted by yawns." Focus on qualitative factors and market-specific adjustments to better reflect private company realities.
If you are applying a multiple to the terminal value of a company for the purpose of calculating exit potential, as in the VC method, then there's a fairly strong argument in favour of public multiples: they provide the most reliable and accessible data, giving you perspective on the growth potential within a particular industry. We provide multiples based either on industry averages, based on the research of Professor Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University. In addition to that, you can also build a list of comparable public companies and derive a more specific multiple of revenue or EBITDA based on the median or average of those multiples.
Understanding the nature of the business being valued is often crucial. Databases cover broad spectrum of companies from similar industries. Valuers and analysts should narrow the data of companies that most resemble the nature and size (Revenues, profit margins, Leverage, Shareholding) of the business being valued. Keep in mind the relevant risks of the comparable companies.
Another common source of data for market multiples is the historical transaction data of mergers and acquisitions (M&A) or private equity (PE) deals in the same or similar industry as the target company. Transaction data reflects the actual prices paid by buyers and sellers in the market, and may capture the synergies, premiums, and discounts involved in the deal. However, transaction data may not always be available or reliable, as some deals may not be disclosed or reported, or may have confidential terms or special conditions. Therefore, you need to verify the quality and accuracy of the transaction data from various sources, such as deal databases, advisors, press releases, and industry publications, and adjust their multiples for any non-recurring or non-operating items.
Acquisition price data is not generally available for the majority of private transactions in the lower- and mid-market segments, because those companies are privately owned and the parties shield the deal terms under NDAs to protect proprietary business and financial information. In sectors where brokers play a significant intermediary role, they are usually the only players with industry-wide price data but they typically refuse to disclose it. Even when/where transaction data is publicly available, one must be very careful to find properly comparable situations. Sometimes macro-economic developments - such as the significant interest rate increases during 2022-23 - can render large bodies of historical data irrelevant.
Being a member of an industry association like the AIBB provides a significant advantage. Members have access to resources like Bizstats, which offers a great deal of business sales data. This access provides a more comprehensive and detailed view of transaction data. It allows for a more nuanced understanding of market multiples, taking into account a broader range of transactions. When utilising transaction data it's crucial to approach the information with a discerning eye. It's important to adjust the multiples for any non-recurring or non-operating items to ensure that the data accurately reflects the value of the business in question. This level of detailed analysis helps in creating a more accurate and fair valuation.
This type of data is not easy available at least that you belong to some association or some one sharing a database with you. This is a real problem when you need to obtin certain information about industry. Here in México its very limited.
Transaction data, such as mergers, acquisitions, and other deals, provide insight into real-time market dynamics. This data reflects what investors are currently willing to pay for assets, offering a practical benchmark for valuation. Analyzing these transactions helps to identify market trends, valuation multiples, and investor sentiment, ensuring a more accurate understanding of the market landscape.
A third common source of data for market multiples is the industry reports and surveys that provide insights and benchmarks for specific sectors or segments of the market. Industry reports and surveys are usually prepared by professional associations, research firms, consultants, or regulators, and may include industry-specific multiples, such as revenue per user, EBITDA margin, or price per square foot. However, industry reports and surveys may not always be up-to-date or consistent, as they may have different methodologies, assumptions, or definitions of the industry or the multiples. Therefore, you need to understand the scope and limitations of the industry reports and surveys, and compare their multiples with other sources of data.
BEWARE OF USING INDUSTRY REPORTS PREPARED BY MARKET RESEARCH COMPANIES TO FIND MARKET MULTIPLES FOR VALUATION PURPOSES. The quality of these Reports is generally quite poor: the data is usually out-dated, it is often drawn from public or industry sources that are not really relevant to your matter, it is often aggregated at high levels (national or international) that do not apply to your company's local/regional/national market, and it often is aggregated so that it includes part or all of other industry sectors so that it is impossible to apply it meaningfully to your particular situation. In addition, the source(s) of the data presented in these kinds of industry reports is often not identified and it is difficult to authenticate it.
A fourth common source of data for market multiples is the internal data of the target company or its competitors, customers, or suppliers. Internal data may include financial statements, budgets, forecasts, contracts, or invoices, and may offer more detailed and relevant information about the target company's performance, growth potential, and competitive position. However, internal data may not always be accessible or comparable, as it may be confidential, proprietary, or subject to legal or ethical restrictions. Therefore, you need to obtain the permission and cooperation of the target company or its stakeholders, and ensure that their data is reliable, consistent, and comparable with other sources of data.
Internal data - from either the acquisition target or comparable companies - is the least obtainable and also generally the least reliable basis for determining an acquisition price multiple. On the one hand, internal data from the target is by definition insufficient because a price multiple is set in the context of prevailing norms in the market at large, not on the basis of the target alone. On the other hand, it is highly unlikely that you will successfully obtain meaningful data from comparable non-public companies since they are, by their position in the market, competitors of the target and they will actively protect and shield their internal data because it contains proprietary competitive information.
Relying on internal data can lead to a myopic view of a company's value. While internal data is detailed, it lacks the broader market context essential for accurate valuation. Elon Musk advises, "Don't just follow the trend. Fight the trend." Integrate external benchmarks and industry standards to avoid insular and potentially biased valuations.
Internal data, like sales figures, customer behaviors, and operational metrics, can be a goldmine for market analysis. This data offers a unique perspective on your company's performance and its position within the market. Leveraging internal data allows for tailored insights that align with specific business strategies, helping to optimize decision-making processes and identify growth opportunities that external data might overlook.
In my view, the valuation of SaaS companies is increasingly influenced by a broader range of data sources. Real-time analytics, user engagement patterns, and AI-driven insights are critical in shaping market multiples. The integration of ESG metrics is also essential, reflecting a growing emphasis on sustainable and ethical business practices. These developments suggest a shift towards a more dynamic, comprehensive approach to valuation, particularly important in the fluid and diverse private SaaS market. Embracing these modern data sources and analytical tools can lead to more accurate and insightful company valuations.
At @omnifin we constantly build and curate our our databases while valuing companies that act as a helpful repository of database for our valuations. Apart from various credible reliable sources, we usually rely on our internal database to keep better control on valuation inputs. This may require additional effort in many cases, but is often worth it.
Valuation isn't just about numbers; it's about narrative and future potential. Focus on storytelling and strategic vision, which can be more compelling than static multiples. As Jeff Bezos says, "In the end, we are our choices." Craft a valuation narrative that highlights growth opportunities, disruptive potential, and strategic advantages for a holistic and persuasive assessment.
Leveraging diverse data sources is crucial for accuracy and reliability. Public company data offers transparency and benchmarks, while transaction data provides insights into real market conditions. Industry reports can highlight trends and competitive positioning, but internal data is often the most tailored and relevant for specific valuations.