- There is a large enough number of transactions
involving these private businesses (assets), and
information on transactions prices is widely
available. - The transactions prices can be related to some
fundamentalmeasureofcompanyperformance(like
earnings,bookvalue,andsales),andthesemeasures
are computed with uniformity across the different
companies. - Otherinformationencapsulatingtheriskandgrowth
characteristicsofthebusinessesthatwerebought is
also easily available.
With real assets(art, collectibles,and realestate), relative
valuationiswidelyusedsincetheseconditionsholdforthe
mostpart.AllonehastodoischeckoneBaytoseethatthe
owners of valuable baseball cards or Tiffany lamps price
thembasedonrecenttransactionsinvolvingthesameassets.
Thepricespaidforresidentialpropertyhavegenerallybeen
basedonthepricesatwhichsimilarpropertieshavesoldin
therecent past. Withcommercialreal estate,thevalues of
officebuildingscanbe estimatedasamultipleofexpected
rental income or square footage, since this information is
available on other recent transactions.
Withprivatebusinesses,itbecomesmoredifficulttousethis
approachforseveralreasons.Thefirstisthatthesphere of
comparable businesses becomes much smaller and
transactions occur far less frequently. Even when they do
occur,transactionspricesmightnotbemadepublicormay
reflectotherconsiderations (suchas taxplanning). Finally,
there are wide differences in accounting standards and
practices,skewingstandardizingmeasuressuchasrevenues