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What are the steps to identify comparable companies for a business valuation?

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Business valuation is a crucial skill for investment bankers, as it helps them advise their clients on mergers and acquisitions, capital raising, and strategic decisions. One of the most common methods of business valuation is the comparable company analysis, which compares the target company to a set of similar companies based on financial metrics and ratios. But how do you identify comparable companies for a business valuation? Here are the steps you need to follow.

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Yigit Tileylioglu

VP of Finance | Finance Director | Finance Business Partner | Technology | SaaS | Start-ups | FP&A | M&A | Corporate…
Huzaifah Rashid

Team Lead, North America & Global Private Equity, Global Private Credit, Permodalan Nasional Berhad | ESG and Impact |…

1 Define the criteria

The first step is to define the criteria that will help you narrow down the universe of potential comparable companies. These criteria may include industry, geography, size, growth, profitability, capital structure, and business model. You want to find companies that operate in the same or similar markets, face the same or similar risks, and have similar financial characteristics as the target company. Depending on the availability of data and the level of detail you need, you may use different sources to filter and screen the companies based on these criteria, such as financial databases, industry reports, analyst coverage, and news articles.

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Huzaifah Rashid

Team Lead, North America & Global Private Equity, Global Private Credit, Permodalan Nasional Berhad | ESG and Impact | Bibliophile
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Both quantitative and qualitative aspects: Qualitative: - Country of operations - Sector - ESG criteria - Business model Quantitative: - Market capitalisation - Growth rate - Profitability - Capital structure - Quality of earnings

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2 Select the peers

The next step is to select the peers that will form the basis of your comparison. You may start with a large list of potential peers and then apply qualitative and quantitative filters to refine it. Qualitative filters involve using your judgment and industry knowledge to exclude companies that are not relevant or representative of the target company, such as competitors with different strategies, products, or customer segments. Quantitative filters involve using financial metrics and ratios to rank and compare the companies based on their performance, valuation, and growth prospects. Some of the common metrics and ratios used in comparable company analysis are revenue, EBITDA, earnings per share, price-to-earnings, enterprise value-to-EBITDA, and price-to-book.

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Huzaifah Rashid

Team Lead, North America & Global Private Equity, Global Private Credit, Permodalan Nasional Berhad | ESG and Impact | Bibliophile
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Established data provider such as Bloomberg, Capital IQ etc., might readily have recommended peer list, however it is up to analysts judgment to identify outliers or to further customize the list based on our understanding of the business / industry

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3 Collect the data

The third step is to collect the data that will enable you to calculate and compare the metrics and ratios of the selected peers. You may use various sources to obtain the data, such as financial statements, annual reports, investor presentations, SEC filings, and market data providers. You need to ensure that the data is reliable, consistent, and comparable across the peers. You may also need to adjust the data for any one-time or non-recurring items, such as impairments, restructuring charges, or gains from asset sales, that may distort the true performance or valuation of the companies.

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4 Analyze the results

The final step is to analyze the results of your comparison and draw insights and conclusions about the value of the target company. You may use different methods to present and interpret the results, such as tables, charts, histograms, or scatter plots. You may also use descriptive statistics, such as mean, median, standard deviation, or range, to summarize and compare the distribution of the metrics and ratios across the peers. You may also use regression analysis or multiples-based valuation models to estimate the implied value of the target company based on the observed values of the peers. You should also consider the strengths and limitations of your analysis, such as the quality and availability of data, the selection and relevance of peers, and the assumptions and adjustments made.

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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?

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Yigit Tileylioglu

VP of Finance | Finance Director | Finance Business Partner | Technology | SaaS | Start-ups | FP&A | M&A | Corporate Finance | Project Finance | Entrepreneurship | Renewable Energy
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Finding a perfect match for comparable companies is a challenging process, and some degree of judgment is involved in the selection process. Recent transactions or mergers and acquisitions, involving similar companies in the industry can provide insights into valuation multiples and market dynamics.

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What are the steps to identify comparable companies for a business valuation?

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1 Define the criteria

2 Select the peers

3 Collect the data

4 Analyze the results

5 Here’s what else to consider

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