The Direct Market Data Method of
Valuing Midsize and Smaller
Closely Held Businesses1
RAYMOND C. MILES
The Direct Market Data Method (DMDM) is one of several methods included in the market approach to business valuation. It is the preferable method for valuing closely held midsize and smaller businesses. Specifically, the DMDM uses information on actual sales of closely held businesses to develop a value estimate for the target business.
The DMDM is similar to the so-called Guideline Company Valuation Method,2 but with important differences. In the Guideline Company Method, usually a small number of public or private companies is selected as similar to the target business. The target business is then compared to the guideline companies, and the value of the target business is estimated from the prices of the guideline companies or their stocks.
In the Direct Market Data Method, all transactions for which market data is available are considered as a statistical ensemble that defines the market for businesses of the same general type (e.g., SIC category) as the target business.
The market having been defined by these transactions, the target business is analyzed (by more or less conventional means) to determine its desirability relative to the overall market—that is, whether the target business is more or less desirable than the typical market transaction, and by approximately how much.
The market value of the target business is then estimated from the prices for which other, equally desirable, businesses have sold. This is a major difference between the Direct Market Data Method and other methods of valuing closely held businesses.