The Direct Market Data Method (DMDM): What is it?

The Direct Market Data Method (DMDM) is one of several methods included within the Market Approach to business valuation. It is the preferable method for valuing closely held businesses of midsize and smaller. The DMDM develops a value estimate for the target business through use of information from the IBA Transaction Database on actual sales of a large number of closely held businesses.

The DMDM is similar to the so-called guideline company valuation method, but with important differences. In the guideline company method, several public companies (usually a small number) are selected as being similar to the target business. The target business is then compared to these guideline companies and to their stock prices.

In the DMDM, all transactions for which market data is available are considered as a statistical ensemble that defines the market for businesses of the same general type, e.g. SIC category, as the target business. The market having been defined by these transactions, the target business is analyzed by conventional means; including economic analysis, industry analysis, financial analysis; to determine its desirability relative to the overall market. That is, the analysis determines whether the target business is more or less desirable than the typical market transaction, and by approximately how much. The market value of the target business is then estimated from the prices for which other, equally desirable, businesses have sold.

The DMDM's use of a statistical ensemble representative of the entire market, instead of a limited number of publicly traded "same or similar" businesses, is a major difference between the DMDM and other valuation methods under the Market Approach. While other methods based on comparisons are about companies, the DMDM is about markets.