According to the business appraiser respondents included in the 2014 Pepperdine Capital Market Report, domestic economic uncertainty is the most important issue facing private-held businesses today. The survey, deployed in October 2013, indicated that the appraisers also believe that government regulation and taxes are significant issues facing the privately-held business sector.
The survey included 166 business appraiser respondents with most companies valued by these appraisers having revenues from $2 million to $50 million. The survey found that the discounted future earnings valuation method is the overwhelming favorite among respondents to value privately-held businesses. For those appraisers using a multiples-based method of valuation, the preference was for an adjusted (recast) EBITDA multiple followed by a revenue multiple. Respondents indicated using an average risk-free rate of 3.4% and an average market (equity) risk premium of 6.3%
For purchases of a control interest, the indicated discount for lack of marketability (DLOM) ranged from 11% for companies with $250m in revenues to 19.8% for $100,000 in revenues. The DLOM for revenues of $25 million and $1 million was 13.4% and 17.2% respectively.
Over the last 12 months, the appraisers saw increases in competition, general business conditions, fees for services, number of engagements, company specific risk premiums and cost of capital. In line with their view on economic uncertainty, the appraisers expect degradation over the next twelve months in general business conditions, number of engagements and time to complete an appraisal.
The Pepperdine private cost of capital survey examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, private-held businesses, investment bankers, business brokers, limited partners and business appraisers. The survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates and the economy in general.
Thus far, we have taken a look at the survey results from the bank/asset-lending and business appraiser segments. We will continue to review results of other segments in later posts.