Comparables or ‘Comps’ are a term coined from the real estate world. Recently sold properties with similar characteristics to your property represent a gauge of your expected value if you’re going to sell. This translates into selling a company.
For a company to be a reliable ‘comp’ to yours, the following criteria is needed to ensure applicability:
- Size: EBITDA, Revenue, Employee count
- Offering: Products, Services
- Market Segment: Segment, Sub-Segment
There are two types of ‘Comps’ most used to help gauge market value of your firm: M&A Comps and Trading Comps. M&A Comps use similar recent deals to enable you to calculate multiple of EBITDA and Revenue which can then be applied to your own company’s metrics. M&A Comps are especially useful when valuing private companies. However, private companies don’t release financial information so obtaining independently verifiable financial data on private M&A deals is usually impossible. As Alderman & Company specializes in the middle-market for Aerospace and Defense, most of our deals are private companies, so we keep a database of recent deal activity within the Aerospace & Defense industry based principally on deals we have done.
Public Comps utilize publicly available financial data to calculate multiples. These companies are often much larger than middle-market A&D so discounts for a lack of marketability, control, and size must be applied when used in ‘Comp’ calculations.
‘Comps’ are a quick way to understand the current market and valuations. Whilst we never rely solely on ‘Comps’ in actual transaction negotiations, they do add to a well-rounded valuation and deserve a certain level of weighting. A valuation tool that is far more reliable than ‘Comps’ is the DCF. In a future Deal Note, we will address DCF’s and why Alderman & Company has relied on DCF’s as our #1 valuation tool for more than 20 years.
Have a great day everyone.