The Five Reasons Sold Comparables Are Problematic As A Business Valuation Tool

Feb 14, 2023

As a commercial real estate firm with licensed offices in Washington & Oregon, IBA frequently uses market comparables for the valuation of real property assets.  Comparables can be a valuable tool for pricing leases and property. Market information when leasing retail, office, or industrial spaces due to the commonly, large quantity of alternative space options and plentiful, pricing comparables related to recently executed leases and available square footage allows for good faith negotiations to be conducted between a potential tenant and the property owner from a foundation of knowledge using this reference information.  Similarly, information ranging from government tax assessments of real estate to similar properties available for sale to completed transactions in the area involving the same class & size of building provide excellent tools to assist with real estate valuation.  It is also a huge benefit to the consumer that real estate sale information in publicly reported.

Unfortunately, the excellent tool of sold comparables is of marginal benefit in the valuation of privately held companies and family businesses.  The first obstacle to this information being used as an effective, market comparable is that it is not generally publicly reported due to the confidential nature of the information and its potential value to competitors and investors in the relevant industry.

However, even when it is reported by firms similar to IBA as a collaborative activity within the industry, five inherent flaws exist in using the information as a valuation tool.

The first problem when assessing a business sale comparable where basic information related to the industry, location, revenue, profit, and sale price are reported is unless a party was directly involved in the deal the motivation behind the transaction is likely unknown.  In my approximately thirty years as a mergers & acquisitions intermediary, I have been involved in business sales where I represented estates because ownership was deceased; parties who were terminally ill; business partners and spouses motivated to sell to separate community assets; parties who received “offers they could not refuse” from private equity firms doing rollups and publicly traded companies who wanted to increase market share or eliminate competition; and entrepreneurs retiring who were willing to wait for the right price or successor. Each of these situations results in a different dynamic for a transaction.  An assessment that a company sold for X price with Y revenues and Z EBITDA in a valuation process does not disclose the underlying motivation for the transaction of the seller and/or buyer.

One advantage IBA offers its clients in the Pacific Northwest is that in our nearly fifty years serving that entrepreneurial community we have completed more transactions, over 4200, than any other business brokerage firm and have “in house” detailed information related to the deals we have successfully facilitated.  Pick any of the over eighteen industries ( we have knowledgeable, experienced, highly skilled representation teams serving and those intermediaries can talk intelligently about what they have done and the market dynamics behind the transactions.  As an example, our auto repair industry transaction team has recently completed deals in communities ranging from Bellevue & Kirkland on the Eastside of the Seattle metropolitan area to Tacoma and Bothell to Hillsboro.  I challenge you to find another firm that has done more deals in this space recently or over time.

The second problem with using a business sold comparable for valuation is the short shelf life of the relevancy of the information in our rapidly changing domestic economic environment.   In 2019, the United States economy was thriving with low unemployment, rising wages across the spectrum, controlled, growing Gross National Product at 2.29% (, and an inflation rate of 2.3% (  Businesses sold during this year and into early 2020 were facilitated with positive growth projection and buyer enthusiasm.  2020 saw the arrival of the COVID-19 pandemic, aggressive government control of the economy and business practices, fear of the unknown, and business sales in the Pacific Northwest motivated by a desire to relocate to states with different public health policies.  2022 saw supply chain issues, employees reluctance to return to work on location, and the highest inflation rates experienced in America in over forty years (   Ask yourself given this recent turbulence in the economy, is a business sale comparable from January 2020 a good reference point for establishing value on January 2021 and is one on January 2021 good for establishing value in January 2022, how about using March 2020, 2021, or 2022 as a reference point for valuation in March 2023 even if the business is in the same industry and location?

The third element to consider when using business sale comparables for valuation is are you comparing apples to apples in terms of business models.  IBA is recognized as a market leading business brokerage firm in the construction industry with the ability to value companies in that space from a position of knowledge & experience.  A subset of that industry where IBA has successfully sold businesses are roofing companies. Business models employed by roofing companies can vary greatly.  They can operate with employees or primarily do installations with subcontractors.  They can purchase plywood, shingles, and other materials in quantity and deliver them corporately to work sites or have products delivered to the property by suppliers.  Executive management decisions related to employment of a business model impact growth and profitability.  Knowing business model details when comparing business sold comparables to a current valuation project is fundamental to producing an accurate assessment.  Otherwise, it can be like comparing the product of a restaurant that serves steak to one that uses the meat as a component of broccoli beef.  Both can be served to the table successfully, but the business models to create customer satisfaction are very different.

Another problem with using business sold comparables is that the number of relevant businesses for comparison can be small or non-existent locally resulting in the need to employ a larger geographic area to find a desired quantity for assessment.  Comparison of business sold comparables within a specific metropolitan area or state can be a useful tool, but when state lines are crossed the value diminishes.  The reason the value diminishes is that the environment for operation of a business can be significantly different from one state to the next.  As an example, IBA sells companies in both Washington & Oregon.  Washington has a high sales tax rate and no state income tax.  Oregon has no sales tax and a state income tax.  As a consumer living in Vancouver, Washington, purchasing products in Oregon can be a favorable decision.  However, from a personal income perspective people living and operating companies in Clark County, Washington take more money home per dollar earned than those filling the same position or running a similar company in Multnomah County, Oregon.   Tax environments, labor rates, and occupancy costs can all have a positive or negative influence on the market value of a business.

The fifth and final element that can make a business sold comparable problematic as a tool for valuing a business is that market dynamics can have a positive or negative influence on company value and without knowledge of historical or present market dynamics data for a specific place & time, a one off business sold comparable can have little value.  At one point, IBA’s Veterinary Practice Sale Division had multiple VC backed companies actively competing for the hospitals we brought to market and bidding up prices.  This market dynamic was good for our clients, but it was not a market dynamic that lasted indefinitely.  Recently, a similar environment exists involving HVAC companies.  In contrast, industries like hospitality can see food trends and the businesses that provide the products rise and fall.  When I was growing up, Dairy Queen and Baskin Robbins were the ice cream choices.  My children gravitated toward Menchie’s and Yogurtland. Today near my home, Salt & Straw and Molly Moons are popular for frozen desserts.  Selling a business model at its height of popularity can result in a strong market driven valuation.  Selling it when a product has fallen out of favor, can produce a value proposition opportunity for a buyer.

Business valuation is a sophisticated, subjective science that requires knowledge, experience, and skill to do properly.  It is recommended that a professional be employed who has knowledge of market conditions for business sales in the relevant industry and geographic area.  Reliance solely on sold market comparables is not best practice.  IBA always utilizes multiple business models when providing a professional opinion of a company’s market value.  IBA provides complimentary business evaluations to potential clients in the Pacific Northwest.   All information shared with IBA is held in strict confidence.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.