Comparable Company Valuation Analysis Method

The comparable company valuation model is built on the idea that the valuation of your target company would be close to that of a company that is similar to your target. Eventually what you would try to arrive at is a table with the best suited comparables and their multiples that helps you make inferences on the fair market value of your target company.

Identifying the most similar company to the target you are trying to value is critical to building a robust and defendable valuation model. The starting point for this analysis is to have a comprehensive comparable company universe at your disposal.

Platforms like Bloomberg, CapitalIQ provides you well organized datasets on public company financials for you to use. This is highly automated in SignalX where the platform provides comparable recommendations based on its own intelligence.

Setting Comparable Criteria

There are multiple factors that decide whether a company is a good comparable company for your model. It is a good practice to do a preliminary selection of comparable companies using the below mentioned criteria and then dig deeper into each. We call this creating your Comparable Company Universe.

There are many factors that contribute towards whether a company is fit for your comparable universe. Here is a list of some of these factors:

  • Products and Services
  • Industry Classification
  • Geography
  • Size
  • Multiples and Financial Profile

Products and Services

Understanding the products and services that your target company offers is the obvious first step in identifying a similar company. Subsequently, you would look at the industry in which the target is offering these products and services. A HR Tech platform company and a HR services company may both below in the same industry but dont match on their offerings. Similarly a luxury apparel maker is not a good comparable to firm producing mass market clothing products, although both belong to the same industry. A cursory check on the target and using the data from its website helps you figure its products and services.

SignalX maintains the largest catalogue of companies classified based on the products and services they offer. This allows us to make quick matches and provide comparable company recommendations for you to evaluate. Other alternatives for this is cursory check or subscribing to platforms like Bloomberg, CapitalIQ, and Dun&Bradstreet.  

Comparable Company Valuation Analysis

Industry Classification

Having a robust Industry Classification List helps you place your prospective comparable companies in appropriate buckets. Job-sites like Indeed, LinkedIn etc are a gold mine for industry database. If you're a valuation professional running comparable company valuation models often, you may want to build your own list, or subscribe to Industry Classification Tables available with platforms like Bloomberg or SignalX.ai.

Once your prospects match on the offerings and the industry, you can further filter the list by comparing their size and geography.

Geography

Geography places a key factor in valuation determination. Purchasing power parity varies by geography, meaning a product that costs X dollars in the USA will not cost X dollars converted to rupees in India or Bangladesh. This is to be kept in mind when comparing companies cross border. Their financials may have to be normalized.

Also, different countries may require companies to adapt to different operating procedures, demographics, consumer behaviour, business model, pricing, tax and legal structures.

Size

Running a headcount check through LinkedIn or through the labor department to get a more accurate figure is an easy way to estimate the size factor of your prospective comparable company universe. If you have accurately classified your prospects based on products and services, then size could also be determined by revenues of your prospects given the same products and services.

A SaaS company in HR tech might have lesser people on their payroll compared to a HR tech company that primarily offers on-premise software implementation and management, or custom software development. A robust products and services classification helps you get this right. .

Well, with the above cursory checks, you will now have created a robust comparable company universe. A 10 company list would be a good size at this point. You may not be able use this method when valuing entities for which comparable companies cannot be found. This is a real possiblity since new age companies use technology and business models that are sometimes very far off from the ones that their listed peers may use, thereby being differentiated in their products and services. Looking for cross border comparables, but factoring in geography specific attributes could be a good method in such cases. Alternatively, you could also look for recent private transactions similar to the target company and take cues. This is out of scope of the current context of this post.

Now, diving further deeper.

Multiples and Financial Profile

Plotting historic revenue growth rates, EBIDTA / Profitability of the target company and that of its comparable prospects helps you visually identify outliers and remove them from your comparable universe.

Comparable Company Valuation Analysis Automation

And, within the identified prospects, plotting EBITDA multiple, BV multiple, Revenue Multiple and Earnings multiples helps you identify outliers. This is laborious when done manually. SignalX automates comparable company benchmarking to help you chose better.

Since these multiples are normalized figures, if you are able to observe that they trend together with each other, and with the multiples of your target, this means you may now have a robust set of comparable companies for your valuation model.

Comparable Company Valuation Analysis

Apart from the multiples, you may also want to take a deeper look at the leverage in the firms. Similarly leveraged firms in similar industries carry similar risk to its investor and hence similar expected returns.

A deep dive financial analysis on all your comparables is handy when it comes to your valuation documentation. You can automate this on SignalX with ease, as well as platforms like Bloomberg and CapitalIQ.

Once you're here, you will now arrive at a table like this.

Comparative Company Analysis Model

You can offer a range of possible valuations for your target, or a mean or a median value. Documenting comparable company financials, multiples and rationale behind multiple selection is key in creating a clean and defendable valuation report.

If you're a valuation professional interested in leverage technology in gaining efficiency in your analyses, let's talk! Schedule a demo with us. Join leading Valuation, Diligence and Forensic teams on our platform in putting technology to work.