Products and Services
Understanding the products and services that your target company offers is the obvious place to begin when trying to identify a comparable company. Subsequently, you would look at the industry in which the target is offering these products and services.
An HR Tech platform company and an HR services company may both be in the same industry, but don’t offer the same products and service and have very different financial profiles. Similarly, a luxury apparel maker is not comparable to a firm producing mass-market clothing products, although both compete in the same industry.
A cursory check on the target and using the data from its website can help you figure out what products and services the company offers.
Having a robust Industry Classification List helps you place your prospective comparable companies in appropriate buckets. Job-sites like Indeed, LinkedIn etc. are gold mines for identifying the industry in which a company operates. If you’re a valuation professional running comparable company valuation models often, you may want to build your own list and this can be a very labor intensive process, so often they subscribe to tools.
Once your prospects match on the offerings and the industry, you can further filter the list by comparing their size and geography.
Geography places a key factor in valuation determination. Purchasing power parity varies by geography, meaning a product that costs $10 dollars in the USA will not cost $10 converted to pesos in the Philippines. This is to be kept in mind when comparing companies across borders. Their financials may have to be normalized. Also, some countries may require companies to adapt to different operating procedures, demographics, consumer behavior, business model, pricing, tax, and legal structures.
Running a headcount check through the labor department to get a more accurate figure is an easy way to estimate the size factor of your prospective comparable company universe. If you have accurately classified your prospects based on products and services, then size could also be determined by the revenues of your prospects given the same products and services. A SaaS company in HR tech might have fewer people on their payroll compared to an HR tech company that primarily offers on-premise software implementation and management, or custom software development.
A robust products and services classification can help you get this right. With the above cursory checks, you can create a robust comparable company universe. A 10-company list would be a good size at this point. You may not be able to use this method when valuing entities for which comparable companies cannot be found. This is a real possibility since new age companies use technology and business models that are sometimes very far off from the ones that their listed peers may use, thereby being differentiated in their products and services.
Looking for cross-border comparables, but factoring in geography-specific attributes could be a good method in such cases. Alternatively, you could also look for recent private transactions similar to the target company and take cues. This is out of the scope of the current context of this post.