One of the first valuation methods used in reaching a company valuation is the comparable companies analysis. The comparable companies analysis allows the banker to be able to compare the metrics and multiples of companies within the same scope as the target company they are trying to value. Essentially, the comparable companies analysis is a valuation method that derives a company’s value from comparable companies within the market.

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Before selecting comparable companies, it is important that the banker has a firm understanding of who their target company is in order to effectively choose a comparable universe. Researching their target company should be the first step in selecting their comparable universe, as being able to will ensure the most relevant set of comparable companies possible - ensuring a more accurate ballpark estimate of the target’s value. This means diving into a companies financial statements such as the 10-K, 10-Q, SEC filings, equity research reports, etc… Once the banker is able to have a firm understanding of their target, the next step is to try to identify companies that share core business characteristics (sector, products and services, customers and end markets, distribution channels, and geography) as well as a similar financial profile (size, profitability, growth profile, return on investment, credit profile). Once further research is conducted, the banker will then begin to screen for the most relevant and comparable companies as possible (roughly 10-15 depending on how many comparable companies there are).

When valuing comparable companies and measuring their multiples, it is important that the banker knows where to access the necessary financial information. To keep it brief, I will provide a list of sources that will cover each specific financial information item as follows:

One the necessary financial information is located, it is now time for the banker to calculate the spreads, ratios, and trading multiples for the comparable companies universe - known as benchmarking. To keep it brief, the following multiples and financial data are used for each different financial profile framework:

Once the comparable companies universe is selected and the financial information, ratios, spreads and multiples are found, the next step is for the banker to benchmark the companies. Through doing so, the banker is able to effectively compare the companies and determine the target’s relative ranking amongst the other comparable companies’ values. Once benchmarked, the banker will further refine the comparable companies universe in order to provide a more closer set of comparable companies to the target.

Now that the companies are benchmarked, the banker will now derive the value of the target company through the means and medians of the most relevant multiple for the sectors. The end-goal is to have the tightest range, as a more accurate valuation will occur from it. Once a range is identified, the banker will have a valuation estimate, however it is important that the banker compares the valuation from the comparable companies analysis with other valuation methodologies such as a DCF analysis, precedent transactions, and LBO analysis. If there are extreme discrepancies, it is important that the banker revisits the models to identify the problem.