Deal Notes - Registered Logo

Discounts to Public Comparables

In Deal Note 114, we touched briefly on the topic of Discount for Lack of Marketability (DLOM). Here we will explore in more detail how small privately-owned companies can use valuation metrics for large aerospace and defense companies public comparable company analysis (“public comps) to accurately estimate their current market value.

To properly run Public Comps, we have found over the past 23 years that utilizing the following levers provides the most accurate prediction of value for a small aerospace and defense company: strong samples of comparable publicly traded companies, a Discount for Lack of Marketability (DLOM), a control premium (as individual shares of public companies do not afford control, if selling your private company does yield control), and a size discount (assuming your company has revenue under $150 million).

Strong Samples of Comparable Publicly Traded Companies
The foundation of a robust public comps analysis is the selection of appropriate comparable companies. We focus on identifying public companies within the aerospace and defense sector that share similar operational characteristics, market positions, and financial metrics with the subject private company.

Discount for Lack of Marketability (DLOM)
DLOM discounts a comparable public multiple by reflecting the reduced value of an interest in a company due to its illiquidity. It essentially acknowledges the difficulty in quickly converting shares into cash without a significant price adjustment.

Control Premium
A control premium reflects the additional value a private company has as opposed to a public company when making strategic decisions.

Size Discount
Smaller companies generally face higher risks and lower market liquidity compared to their larger counterparts. As a result, a size discount is applied to account for these factors.

For each of the levers mentioned above, we use many sources with large sample sizes that allow us to derive an accurate approximation. We have compiled both our proprietary deal data and third-party reports into a database that allows us to achieve accurate valuation predictions tailored toward private lower-middle market aerospace and defense companies.

Have a great day everyone,

Max McFarland