WFU Law School
Law & Valuation
5.3.1 Public Company Ratios

5.3.2 Comparable Private Company Sales

Using comparable public company sales to value privately-held companies can be misleading. The differences are described by George Hawkins, Banister Valuation. SPRING 1995 EDITION.


Industry standard ratios

There are published rules of thumb for industry standard multiples for a variety of business and professions. In the handbook of Small Business Valuation Formulas, Desmond & Marcello, Valuation Press, Los Angeles (1987), "market derived valuation formulas" are given for --

  • accounting and bookkeeping practices
  • apparel stores
  • auto body shops
  • automobile dealerships
  • bicycle shops
  • building material retailers
  • coin operated and full service car washes
  • cocktail lounges
  • coffee shops
  • coin operated laundries
  • dental practices
  • funeral homes and mortuaries
  • gasoline service stations
  • grocery stores, insurance agencies and brokers
  • manufacturers
  • sales agencies
  • weekly newspapers, travel agencies
  • veterinarian practices and video rental and sales shops

Example

The industry standard approach has now been approved in Smith v. Smith, supra, wherein the Court stated:

The court valued Town and Country [an auto dealership] by use of the industry standard approach, the approach utilized by plaintiff's expert, Nicholson. Under this approach, the value of the dealership is determined by adding the net "hard asset" value (the value of its hard assets minus liabilities) and its "blue sky" value. The expert testimony showed that the blue sky value is determined by multiplying the average pre-tax income of the dealership by a franchise multiple of 1-5. The multiple chosen is subjective and is based upon factors such as the type of franchise, its market performance, location, demographics, median income, economic status, sales, and number of locations. The court here used a multiple of 3 in determining the date of separation value of Town and Country and a multiple of 2 for the date of trial value. The defendant contends there was no basis for the franchise multiples used by the court and that therefore its valuation of this asset is fatally flawed. We disagree.

…The court accepted as valid the industry standard approach, used by Nicholson, noting that it was recognized by a national automobile dealer's association as a legitimate tool for valuing automobile dealerships.

5.3.1 Public Company Ratios

©2003 Professor Alan R. Palmiter

This page was last updated on: August 4, 2003