To Infinity and Beyond:
Statistical Techniques Appraising
the Closely Held Business
DR. THOMAS C. STANTON
Dr. JOSEPH D. VINSO
Statistics, more than any other discipline, can make the ridiculous sound profound. Consider the advertisement: “Our prices are 150 percent below our competitors!” (To be true, we would have to pay customers to take our products.)1 How about this one: “Ir America, there are more divorces than there are marriages.” (That's as ridiculous as saying there are more funerals than deaths.)2 Business valuators are not immune to this propensity for the ridiculous. Have you seen these? “In my professional judgment, this firm should have a growth of 6 percent over the next five years.” (Based on what? Growth in earnings or growth in sales?) “This firm has a beta equal to that of the industry, which I estimate to be 1.” (Your firm's beta will never, ever be 1.)
Cloaked in numbers, the absurd takes on believability. This discussion is concerned with the appropriate use of statistics in the valuation of closely held businesses or litigation support. Used properly, nothing can be more powerful than an elegant statistical presentation. Used incorrectly, nothing can be more damaging. Because o: the importance of precision, a few basic definitions are necessary.
Population: All items of possible interest to us.
1 The competitors sell for $2.50, and we sell for $1.00; sc we are 60 percent
2 It is possible, perhaps likely, there will be more divorces in a certain period
(say, a month) than there are marriages.