7 minute read

Using "Comparable" Sales in a Business Valuation

The word "comps" spelled out in Scrabble tiles.

If you’ve decided to sell your business, congrats. The next step is to decide how much to sell it for. You know your company's valuation in terms of gross profits, net income, blood, sweat, and tears, but there are different benchmarks for figuring out what someone might pay for it.

You don’t want to price it so high you don’t get any offers. On the other hand, you want to walk away feeling good about the sale so you can exit on top.

Understanding the market value of your business is an excellent place to start. In this article, we’ll cover the concept of using comparable sales (comps) for business valuation.

What Are Comps?

Comparable sales, often called "comps," compare similar companies to determine the value of a company for sale.

Let’s say you want to sell a coffee shop, but have no idea what the market value is. You could start by researching the sale prices of similar coffee shops in the area. These other coffee shops are now your "comps” for business valuation.

The idea is also similar to how you might price a house. If you're selling your home, the first place you'd most likely look is Homes.com to see what comparable houses in your neighborhood have sold for recently. This gives you an idea of what buyers might be willing to pay for your home.

Business valuation follows the same principle. You compare the business you want to evaluate to similar companies that have sold recently. These comps analyses can help you estimate the value of the company you want to sell.

However, ensuring the comps are equally matched in size, market, and financial performance is essential. Think of it like comparing apples to apples. You wouldn't compare the sale price of a supermarket chain to a small, local grocery store to determine its value.

Business Valuation Methods

Although comps is one of the more widely used ways to evaluate a business, other methods are available. Combining a few approaches to get an accurate reading of your company’s value might be a good idea.

Ultimately, the best business valuation method will be determined by factors like the type of business you’re selling, its financial health, and the reason for the valuation.

Here are some of the more common methods for company valuation.

Market-Based Method

Most appropriate for profitable ongoing businesses, the market-based valuation method involves evaluating a small business by comparing it to other similar businesses that have recently sold. By using data from recently sold businesses with similar financials in the same industry and market, you can calculate comparable pricing multiples. Multiples are a financial tool that allow for comparison of similar businesses with different levels of revenue, cash flow, and sales price.

Asset-Based Method

An asset-based business valuation, typically utilized for unprofitable or closing businesses, focuses on assessing the "book value" by examining the balance sheet. It involves valuing business assets, deducting liabilities, and is often employed alongside other valuation methods during due diligence. Struggling businesses with minimal profits may sell at asset-value, where assets such as real estate and inventory are evaluated to determine the overall business asset valuation.

Income-Based Method

Income-based business valuation relies on forecasting future earnings. This valuation method utilizes two main approaches: capitalization of earnings and discounted cash flow (DCF). The capitalization of earnings method divides historical cash flow by a capitalization rate to ascertain the present value of future earnings, offering insights into risks and potential ROI. Meanwhile, the discounted cash flow method factors in projected cash flows and adjusts for risk using the weighted average cost of capital, typically calculated over a perpetual growth period. By considering both methods, business appraisers can derive a present value of future earnings, providing a valuable complement to market analysis and ensuring a thorough assessment of business worth.

How Comparable Sales Work in Business Valuation

When using comps for business valuation, you must choose the right peer group for comparable company analysis—the process of selecting businesses that are similar in size, industry, and geography.

Here are three factors that play a role in accurately determining a business’s value.

Size: Size matters when valuing a business because a larger company might have different financial dynamics, like more buying power or complex operations, compared to a smaller one. Think of it as comparing a small local bakery to other small local bakeries, not a nationwide bakery chain. An excellent place to start is with Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
Industry: Comparing businesses in the same sector is critical. For example, how a technology startup is valued differs significantly from how a retail store is valued. Each industry has unique factors, like growth potential and risk, which affect business values.
Geography: Location also plays a notable role in comps. Businesses in different geographical areas might have different values, even if they're in the same industry and similar in size. For example, a coffee shop in a bustling city might be valued higher than one in a small town due to customer foot traffic and rent costs.

Where to Find Comps

Finding comps for business valuation involves gathering market data from several reliable sources and methods. Where you find this information will vary depending on the industry, business size, and geographical location.

When searching for comps, ensure the data is as current as possible and relevant to the specific business being valued. This might involve adjusting the comp’s financial data to match the circumstances of the target company more closely, such as its size, growth rate, and market conditions.

Here are some common places to find comparable company data:

BizBuySell: As one of the largest online marketplaces for buying and selling businesses, BizBuySell offers valuable insights into comparable sales and market trends across various industries. Our extensive database can serve as a resource for business owners seeking comps to value their business.
Subscription-based Databases: Serves like Bloomberg, Thomson Reuters, and S&P Capital IQ offer detailed financial information on public companies and, in some cases, large private companies
Professionals: Business brokers who specialize in selling businesses often have access to comps through their networks and past clients
Trade Associations: Certain industries have trade associations that collect and share data among members, including sales data and other financial metrics

Enlisting Experts to Help with Business Valuation

Selling a business can be complicated, especially when using comps for business valuation. Having insight and experience is vital to calculate an accurate valuation.

Enlisting experts in the field can help streamline the process and ensure a comprehensive analysis that aligns with industry standards, geographic nuances, and the unique dimensions of your business's size.

A professional can bridge the gap between guessing at data and making an informed valuation that can empower you to sell your business confidently. Visit BizBuySell’s Broker Directory to find a business broker to help you value your business for sale.

BizBuySell has many tools and resources to help you get started, whether you're buying, selling, or just looking for a market valuation: