Your browser is currently set to block JavaScript.

For full functionality of this site it is necessary to enable JavaScript. Here are the instructions how to enable JavaScript in your web browser.

After enabling javascript, please refresh the page to go back to experts.com site with full functionality

Would you turn off/on JavaScript?

It's a widely used language that makes the web what it is today, allowing for websites to be more responsive, dynamic, and interactive. Disabling JavaScript takes websites back to a time when they were simple documents without any other features.

What are the advantages of using JavaScript?

Speed. Since JavaScript is an 'interpreted' language, it reduces the time required by other programming languages like Java for compilation. JavaScript is also a client-side script, speeding up the execution of the program as it saves the time required to connect to the server.

banner ad
Experts Logo

articles

Regression Analysis in the Market Approach: Using the Gordon Model as a Guide to Selection of Independent Variables

Originally published in The Value Examiner, March/April 2012

By: Jay Abrams, ASA, CPA, MBA
Tel: 818-505-6008
Email Mr. Abrams


View Profile on Experts.com.


Introduction

Regression analysis is a statistical technique to measure the mathematical relationship between a dependent variable and one or more independent variables. In the context of the Market Approach in business valuation, the dependent variable is usually some variation of Fair Market Value (FMV), i.e., market capitalization in the Guideline Public Company method, selling price (IBA), or MVIC (Market Value of Invested Capital, Pratt's Stats). We can use the dependent variable in dollars or as a scaled variable, i.e., divided by sales, earnings, EBIT, etc.

Confessions of a Reformed Quant

I have used regression analysis in valuation ever since I started in the valuation profession in 1983. I used it on my very first valuation-of a major motion picture producer-to forecast syndication revenues as a function of either theatrical revenues or television revenues. (It turned out that the latter was statistically significant, not the former.)

Regressions are enjoyable to perform, and they can be very powerful. It is much harder to argue with a well-done regression than with mean or median multiples with subjective adjustments. One of the great benefits of regression is its objectivity and rich statistical feedback to provide information on its own reliability.

As regression textbooks tend to be very general, they do not address many issues that are specific to business valuation. The textbooks give us the basic tools. They tell us how to use the tools, but not where to use them. Much of what I have learned about using regression analysis has been from experience-a combination of trial-and-error, seeing what works and what does not, and thinking about how to do it better.

In my early years I enjoyed regression so much that I was willing to do "the shotgun approach"-regressing the dependent variable(s) against 100+ independent variables. Even for a quant like me, eventually this became tiring and is very unprofitable on fixed fee assignments. There had to be a better way.

Eventually I realized the need to develop a theoretical model as a guide to tell me where to look for independent variables and-equally as important-where not to look.

Theoretical Relationships between FMV and Valuation Drivers

In this article we develop the theoretical relationship that should exist between FMV and the valuation drivers, i.e., the independent variables that affect value, e.g., income, cash flow, risk, growth, etc. The importance of doing so is:

  1. To reduce the risk of data mining, which is finding apparently statistically significant relationships that are in reality the result of chance through brute force regression analysis of many dozens of variables.
  2. To save time by not having to test independent variables that should have no theoretical relationship to FMV.

The Gordon model multiple is the logical place to start, as it is the value equation of a mature firm. Before diving into it, let's begin with some algebraic definitions.

Definitions

. . .Continue to read rest of article (PDF).


Jay Abrams, ASA, CPA, MBA, founder and head of Abrams Valuation Group (AVG), is one of those rare individuals who integrates theory and practice. He has valued businesses and consulted on mergers and acquisitions in a wide range of industries, provided valuations and discounts for fractional interests and restricted stock, and conducted independent statistical and mathematical research regarding problems facing businesses. During his 25 years of accounting and valuation experience, he has made, and continues to make, significant contributions to the science of valuing businesses. Mr. Abrams' book, Quantitative Business Valuation: A Mathematical Approach For Today's Professionals (McGraw-Hill, 2001) shows how to integrate advanced scientific methods into real-world valuation analysis.

©Copyright - All Rights Reserved

DO NOT REPRODUCE WITHOUT WRITTEN PERMISSION BY AUTHOR.

Related articles

Garibaldi-Group-Logo.jpg

10/18/2017· Appraisal & Valuation

Business Valuations: Different Values for Different Purposes?

By: Michael J. Garibaldi CPA, ABV, CFF, CGMA

There are many more purposes for which valuations are used. Each has its unique presumptions. It must be understood that there is no one value and that the same investment can have a different value to different people and for different reasons. Each valuator must analyze such differences, understand the presumptions inherent in the purpose for which the valuation is to be used, and select and implement a method to determine proper value for the purpose.

expert_placeholder

12/6/2002· Appraisal & Valuation

How to Value Commercial Improvements in a National Park

By: Maurice Robinson, ISHC, CRE, et al

Recently, we were engaged by the National Park Service (NPS) to appraise the structures and other improvements that have been constructed by commercial vendors or "concessionaires" operating hotels, restaurants and other hospitality services in National Parks.

John-Minor-Construction-Expert-Photo.jpg

10/30/2015· Appraisal & Valuation

Property Insurance Appraisals in Florida - Senate Bill 336

By: John Minor

It appears we may just finally have some more Wyatt Earp in place of Billy the Kid in the appraisal industry. Gentlemen and Ladies, check your guns at the city limits of Dodge!

;
Experts.com-No broker Movie Ad

Follow us

linkedin logo youtube logo rss feed logo