In other types of Appraisals, mainly real estate, the market data approach indisputably
will always yield the most accurate results. It is a true representation of the
current marketplace because it is what the market is paying for the same or similar
asset. In the case of a Business, using public or private comparable sales price-to-earnings
or income-to-sales ratios require close attention to the factors that make the comparison
realistic which are:
Comparing Similar Business Types, sales levels, discretionary earnings and
The comparison starts with a similar Business type.
Comparing Business sales levels that are as similar as possible to the Business being
Using a comparison of Discretionary Earnings -- profit on the tax return means very
little -- the sum of all the add backs will determine Discretionary Earnings and
that is the number the Business Appraiser looks to compare. (Some comparables use
Discretionary Cash Flow as well) None use tax return profit.
The Business Appraiser also must compare the asset values of the Comparables
and use the comparables that most closely compare to the Business being
The market data approach can be very useful when analyzing data drawn from the market
as to what types of ROI (return of investment) ratios are customary, or data based
on Price-to-Earning ratios that buyers are willing to pay in order to purchase a
certain type of Business.