Valuing Businesses Using Regression Analysis

CHAPTER 7Multiple Variable Regression

The fourth regression methodology we will employ in the Market Approach is a multiple variable regression. In the first two methodologies we studied we used a single variable, the SDE% of the transactions in the sample, to predict the multipliers of the subject. In the third methodology we used two variables, the SDE% and the square of the SDE%, to predict the multipliers of the subject. In this fourth methodology we will use four variables to predict the actual selling price of the subject: each transaction's revenue, SDE, inventory value, and fixtures and equipment value (throughout the book we will use the acronym FF&E in reference to the company's total furniture, fixture, equipment, and tenant improvements). The resulting formula will take the form:

The advantage of this methodology is that the subject's inventory value and fixtures and equipment value (its hard assets) are now brought into the final calculation of its worth. Revenue multipliers and cash flow multipliers completely ignore the value of a company's assets. For companies that are heavily invested in inventory or fixtures, the addition of these two variables in a regression equation may produce a more relevant conclusion of value. We are also using actual values for the variables rather than ratios in the calculations, which we learned earlier could produce undesirable ...