By: Chris Olson, MBA
Morningstar discontinued the publishing of its annual Ibbotson SBBI Valuation Yearbook at the end of 2013, so now what should valuation professionals use as a replacement?
Currently, there are two leading sources to replace the outgoing SBBI data source. The first option is the Valuation Handbook by Duff & Phelps; this is a new offering and is intended to be a comparable replacement for the Ibbotson SBBI Valuation Yearbook. The second option is the Implied Private Company Pricing Line (IPCPL) by Bob Dohmeyer, ASA; Pete Butler, CFA, ASA; and Rod Burkert, CPA/ABV, CVA.
The Valuation Handbook by Duff & Phelps offers valuation professionals source information in a similar format as the discontinued Ibbotson SBBI Valuation Yearbook, so the transition should be fairly seamless. Valuation professionals will still be able to have a break out of each risk component within the build-up method to arrive at the weighted cost of capital (WACC). However, it is still too soon to definitively comment on this source.
The other option is the Implied Private Company Pricing Line, which was discussed in the September 2013 BVR Business Valuation Update newsletter (http://bvresources.com/freedownloads/BVU_0913_PricingLine.pdf).
Using the Implied Private Company Pricing Line is an innovative way to assist valuation professionals in calculating a company’s WACC using the calculator (http://biz-app-solutions.com/IPCPL.asp), and all that is required is the company’s revenue. For example, the cost of capital for a company with $100,000 in revenue is 23.73%, while the cost of capital for a company with $100 million in revenue is 18.48%, assuming a 0% tax rate for both. The cost of capital difference between the two examples is 5.25%.
Based on what we have seen thus far, it appears that the Duff & Phelps data would be most likely used in a given valuation engagement, given that the IPCPL is only a recent development, and therefore not fully vetted.