Significant Studies Related to the IBA Transaction Database
Age effects: Linear regression of price to earnings ratio on the date of sale for the years 1982 through 1991, and linear regression of price to gross sales ratio on the date of sale for the same years (Raymond C. Miles, Business Appraising in the Real World: Evidence from the IBA Transaction Database, presentation to the Institute of Business Appraisers 1992 National Conference, February 6-7, 1992, Orlando, Florida)
Conclusion: The price to earnings ratio and the price to gross sales ratio of closely held businesses sold during the period 1982 through 1991 show essentially zero correlation with the date of sale.
This study is of extreme importance in that it establishes that transactions reflected in the IBA Transaction Database, which occurred significantly earlier than the subject business appraisal date. can nevertheless be used for valuation purposes.
This is not the case when publicly traded guideline businesses are used under the market approach to value closely held businesses. An article which appeared in Barrons in 1997 titled, The Long Stampede, indicated that the average price/earnings ratio, or P/E, for the Standard & Poor's 500 Stock Index changed from 7 in August, 1992, to 23 in August, 1997.
Terms of payment: Linear regression of price to earnings ratio and price to gross sales ratio compared to down payment expressed as a percentage of sales.
Conclusion: The correlation between price to earnings ratio and down payment is negligible, and the correlation between price to gross sales ratio and down payment is very low. (Raymond C. Miles, Business Appraising in the Real World: Evidence from the IBA Transaction Database, presentation to the Institute of Business Appraisers 1992 National Conference, February 6-7, 1992, Orlando, Florida).
Size effects: A study which divided businesses by annual sales into intervals and calculated a mean price to earnings ratio for businesses within each interval. (Price/Earnings Ratios and Company Size - Data for Small Businesses, Business Valuation Review. September, 1992, Volume 11 No.3, pp 135-139).
Findings:
Annual Sales (Thousands) Mean P/E
$0 to $49 1.66
$50 to $99 2.11
$100 to $149 2.44
$150 to $199 2.74
$200 to $249 3.06
$250 to $499 3.44
$500 to $1,000 4.26
The annual sales divisions were for all businesses within the IBA Transaction Database.
The correlation coefficient between P/E ratio and total business size was 0.3.
Geographic effects: A study which compared Price/Earnings and Price/Gross Sales multiples for businesses in all SIC codes in the IBA Transaction Database. (Raymond C. Miles, Business Values in the Real World: Evidence from the IBA Transaction Database, presentation at the American Society of Appraisers Business Valuation Conference, Houston, October 23, 1993). The results of the study are as follows:
Price to earnings Diff. from Price to gross Diff. from
Region Mean Nat'l avg. Mean Nat'l avg.
Southwest 2.1 -11% 0.54 -4%
Northwest 2.6 +11% 0.57 +6%
Southeast 2.23 -7% 0.56 1.66
Northeast 2.99 +25% 0.54 1.66
All Regions 2.39
0.54
As can be gleaned from the above data, Price/Earnings multiples, and especially Price/Gross Sales multiples, were not materially different from one geographic region to another. Following completion of the study, the author determined that a major reason for the higher Price/Earnings multiples for the Northeast geographic region was submission of many business sales by one business broker who dealt with "high end" businesses.