Pratt's Stats Data Are Not Biased; the DCF May Be, However

At the beginning of Mr. Abrams' article, we are given this promise: “In this article, the author presents a method to reverse engineer the implied growth rates of the Guideline Companies and come to a rational, defensible weighting of methods.” He then claims that there is an upside bias in the Pratt's Stats database and offers an example based upon a single company in one industry to make his case. However, the earnings growth rate low margin/mean reversion bias/asymmetry discussed in the article skews his implied earnings growth results high. We have presented evidence based on a cross sectional, multi-period analysis of all of the relevant Pratt's Stats data that there is no significant bias in the Pratts's Stats private buyer database.

Figure 1

Public versus Private Buyers

Figure 2

Implied G versus EBIT Margin

Figure 3

Margin versus Multiple

Contributor Notes

Pete Butler, ASA, CFA, is a principal at Valtrend, LLC in Eagle, Idaho. He is the inventor and co-developer of the Butler Pinkerton Calculator and one of the co-developers of the Implied Private Company Pricing Line (IPCPL) and the Implied Private Company Pricing Model (IPCPM).

Bob Dohmeyer, ASA, is shareholder at Dohmeyer Valuation Corp in Frisco, Texas. He is one of the co-developers of the IPCPL and IPCPM.

Herb Kierulff, DBA, is the Donald Snellman Professor of Entrepreneurship and Finance in the School of Business and Economics at Seattle Pacific University and founder of the Private Business Valuation Challenge.