What are the challenges of using comparables for cross-border valuation?

1 Accounting standards

One of the main challenges of using comparables for cross-border valuation is the diversity of accounting standards and practices among different countries. Accounting standards are the rules and guidelines that define how financial information is reported and disclosed by companies. Different standards can affect how revenues, expenses, assets, liabilities, and equity are measured and recognized, which in turn can affect the comparability of financial ratios and multiples. For example, the US generally follows the Generally Accepted Accounting Principles (GAAP), while many other countries follow the International Financial Reporting Standards (IFRS). Some of the differences between GAAP and IFRS include the treatment of inventory, goodwill, leases, and deferred taxes. To use comparables for cross-border valuation, you need to adjust for these differences and use a common accounting standard for your target and your peers.

2 Currency fluctuations

Another challenge of using comparables for cross-border valuation is the impact of currency fluctuations on the financial statements and multiples of companies operating in different markets. Currency fluctuations are the changes in the exchange rates between different currencies over time. They can affect the translation of foreign currency denominated revenues and expenses into the reporting currency of the company, as well as the conversion of foreign currency denominated assets and liabilities into the functional currency of the company. These effects can create distortions and volatility in the financial ratios and multiples of companies across different countries. For example, a depreciation of the local currency relative to the reporting currency can inflate the revenues and assets of a foreign subsidiary, while an appreciation of the local currency can reduce them. To use comparables for cross-border valuation, you need to account for these effects and use a consistent currency for your target and your peers.

4 Industry structure

A fourth challenge of using comparables for cross-border valuation is the diversity of industry structure among different countries or regions. Industry structure is the degree of competition, concentration, regulation, and innovation in a given industry or sector. Different industry structures can affect the margins, returns, growth, and risk of companies in different markets. For example, an industry with a high degree of competition, a low degree of concentration, a low degree of regulation, and a high degree of innovation might have lower valuation multiples than an industry with a low degree of competition, a high degree of concentration, a high degree of regulation, and a low degree of innovation. To use comparables for cross-border valuation, you need to consider these differences and use a comparable industry for your target and your peers.

5 Data availability

A fifth challenge of using comparables for cross-border valuation is the limited availability and quality of data for companies in different countries or regions. Data availability and quality are the extent and reliability of the financial and non-financial information that is publicly disclosed or accessible by companies in a given market. Different data availability and quality can affect the selection, analysis, and interpretation of comparables for cross-border valuation. For example, a country with a high level of transparency, disclosure, and standardization might have more and better data for comparables than a country with a low level of transparency, disclosure, and standardization. To use comparables for cross-border valuation, you need to verify and validate the data sources and use a sufficient and representative sample of comparables for your target and your peers.

6 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?