The majority of the 20-million-plus businesses in the U.S. are privately held, meaning they do not trade on a stock exchange. Many of these private businesses need to be valued at one point or another: The business owner wants to give shares to an heir or must deal with the economics of a divorce; a partner wants to get out of his contract; or the owners just want to sell the business. Or, maybe the private company wants to go public involving an initial public offering (IPO), divestitures, employee stock ownership plans, stock redemptions, and leveraged buyouts.
In these cases, the business owner typically hires a business appraiser, often an accountant, to value the company. There are several methods of valuing a business, and each method requires not only a lot of financial analysis, but a good amount of data gathering.
The larger appraisal and accounting firms have the resources to subscribe to database aggregators such as Alacra, OneSource, and Capital IQ for their research needs. However, smaller, independent firms may lack the resources or demand needed for such subscriptions, instead relying on the internet for their research. Luckily, many information services provide data for reasonable per-document or subscription fees.
Guideline Public Company Searches
One common method of valuing a company is the guideline public company method, in which pricing multiples are calculated from the market prices of stocks of public companies identified as comparable to the subject company. Thanks to the internet, it is now easy to look for comparable public companies in one of the many sources of EDGAR filings in addition to stock screens provided on popular finance sites. Use at least two sources to identify comparable companies; I often find a comparable company in a stock screener that I didn't find in the EDGAR database.
You should subscribe to a valued-added source for the EDGAR database of SEC filings, such as 10-K Wizard [http://www.10 kwizard.com], and a stock screener, such as the one provided by Yahoo! Finance [http:// screen.yahoo.com/stocks.html].
Subscribers to 10-K Wizard can search across the EDGAR database, limiting by SIC code, industry grouping, form type such as the 10K, and a keyword in the business description contained in Item 1 of the 10K. While the free EDGAR service provided by the SEC allows users to perform full-text searches and limit by SIC code and form type, the results list is cumbersome to review.
With a stock screener, appraisers can target public companies by industry grouping. Yahoo! Finance's stock screener has about 200 industry groupings. You should search by industry groupings because of the inherent limitations of SIC codes. Some sources, such as 10-K Wizard, pull data directly from the SEC's EDGAR database, relying on the SIC codes originally provided by each public company. Some of these SIC codes were assigned 10 years ago and have never changed. Other sources, such as Yahoo! Finance, license data from a value-added data provider such as Hemscott. These providers actually go through the data obtained from the SEC and change the SIC code to better reflect the company's main source of revenue.
Guideline Transaction Searches
Another common method of valuing a company is the guideline company transactions method, in which market-derived pricing multiples are calculated from the sales of majority interests in companies engaged in the same or similar business lines as the subject company. The comparable transaction search is the most frustrating of all business valuation research because of the difficulty in finding enough transactions with financial multiples. In addition, comparable transaction data is impossible to find for free on the web. Well alright, perhaps it is possible, but it would take a very long time and you would never know if you had done a thorough job.
There are several excellent sources of transaction data. …