New Jersey Forensic Accountant Explains Relative Valuation

Video Transcript 

My name's Robert Bonavito, "New Jersey Forensic Accountant." This video is part of a series of videos where I discuss Forensic Accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.

My name's Robert Bonavito, "New Jersey Forensic Accountant." Today, I'm gonna talk about relative valuation method, and it's a way we use to value companies. In a relative valuation method, we try to find similar-type companies to compare the company who we're valuing to.

You know, remember, valuation is really a craft, okay? The more you do it, the better you get at it. Just like cooking, the more you cook, the better you get. The plumber, the more plumbing you do, the better you get at it. And so the more we do it, the better we get. And we've been doing this for 30 years. But with a relative valuation, sometimes, it's rules of the thumb. You know, some companies sell rules of thumb, you know, a multiple of sales, a multiple of discretionary seller's income. You know, especially small businesses, you know, if the seller is making $30,000 a year, well, maybe it's three times discretionary income, you're selling for $90,000.

And you know, I mean, for small businesses, we find rules of thumb are pretty accurate, you know, because the person going in is not thinking they're gonna make $30,000 for everything. They think they're gonna make a lot more, but that's what the company's making now, or a sub multiple of sale. And this is, you know, for small businesses. For larger businesses, what we'll do is we'll actually go out into the public market. And we have databases. We'll pull down information.

Like let's say we're doing a company in the oil field. Or we'll go look at Ford. We'll look at Chevy. We'll look at all the companies. We'll do analysis of the balance sheets of the P&L, try to derive P/E ratios, cost of sales, EBITDA, all kinds of good stuff in terms of equity, and then we'll compare it to our oil company and try to find a comparison. And if we're able to do that successfully, well, then I have a publicly-traded company with stock price and I know what to, you know...let's say I'm using a P/E ratio, and I know that they're selling, you know, six times earnings or something like that. If your company's making $100 million, well, it's worth $600 million.

So this relative valuation method is very useful. You can apply it to lots of different companies. Sometimes, we use it just as a [inaudible 00:02:41] check. You know, maybe we'll do intrinsic valuation and part of that, we'll do the relative value. The intrinsic is really the cash flow. We'll compare it to see if we're in the ballpark. It should be pretty close. If you have any questions on this video, feel free to contact me.