Comp Companies Valuation
Also known as trading comps. Management team gives you 1 to 2 years projections or equity research comp reports to get forward multiples (x Revenue or x EBITDA ) which may be used as the basis for this valuation. You can get comps from the general overview as it will discuss the target’s comps in the 10K. Find comps with good multiples to then tell your story to the marketplace to then get a certain valuation.
- Select the universe of comparable companies – Choose 7, 8, 10 comps, need their 10K, 10Q, analyst reports to get TEV for each comp then divide by line item to get multiple.
- Locate financial information on comp companies – Information must come from latest filing (10K or 10Q). Print out 10K, 10Q, analyst reports.
- Spread key financial information, ratios and multiples – Calculate TEV (in comp spread tab). To get MVE, use TSM method. TSM = Exercisable options outstanding x (share price – strike) / share price.
- Benchmark comp companies – Get the multiple that the company is trading at for each metric for each comp and get mean and median of comps for the metrics (ex. TEV/EBITDA)
- Determine implied valuation – Multiply mean and median multiple x the revenue or EBITDA to get the valuation range for your target company.
The better the company, the higher the multiple and the better valuation you get.
In IB/PE/CorpFin, you need to know comp companies and transaction comps. “Here are the comps in your sector…”
Higher multiple because…
Operating in better markets, better operations
The multiple tells you which company is better, margin analysis tells you why they are better.
Sell side key question:
“Which comp would you use to guide potential buyers?”