How do you adjust comparables for industry-specific factors?

1 Identify industry-specific factors

The first step is to identify the industry-specific factors that may affect the comparables and the target company. These factors can be related to the industry structure, such as market concentration, entry barriers, regulation, or innovation; the industry cycle, such as growth, maturity, or decline; or the industry risks, such as competition, demand, or regulation. For example, if you are valuing a pharmaceutical company, you may need to consider factors such as patent expiration, research and development (R&D) intensity, regulatory approval, and pricing power.

2 Quantify industry-specific factors

The second step is to quantify the industry-specific factors that may affect the comparables and the target company. This can be done by using financial ratios, industry benchmarks, or historical trends. For example, if you are valuing a pharmaceutical company, you may need to quantify factors such as R&D expenses as a percentage of revenue, patent portfolio size and quality, number and stage of drug candidates in the pipeline, and average selling price and margin per drug.

3 Adjust valuation multiples for industry-specific factors

The third step is to adjust the valuation multiples for the industry-specific factors that may affect the comparables and the target company. This can be done by using different methods, such as normalizing, scaling, or adding or subtracting premiums or discounts. For example, if you are valuing a pharmaceutical company, you may need to adjust the P/E multiple for the R&D intensity by dividing it by the R&D-to-revenue ratio; adjust the EV/EBITDA multiple for the patent portfolio by adding or subtracting a premium or discount based on the patent life and quality; or adjust the P/B multiple for the drug pipeline by adding or subtracting a premium or discount based on the number and stage of drug candidates.

4 Compare adjusted valuation multiples and estimate target value

The final step is to compare the adjusted valuation multiples of the comparables and the target company and estimate the target value. This can be done by using different methods, such as average, median, weighted average, or harmonic mean. For example, if you are valuing a pharmaceutical company, you may need to compare the adjusted P/E, EV/EBITDA, and P/B multiples of the comparables and the target company and calculate the average of each multiple. Then, you can multiply the average multiples by the target company's earnings, EBITDA, and book value to estimate its value based on each multiple. Finally, you can take the average of the three values to estimate the final target value.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?