Before you buy, sell or invest in a company, you need to know how much it’s worth. The widely accepted way to arrive at that number combines a series of three relative and intrinsic valuation models: private comps, public comps and discounted cash flow (DCF) analysis.
Together these valuation methods help investors, business owners and transaction advisors gauge a company’s current market value and then assess whether it's under- or overvalued.
The first step in assessing the value of a privately-owned company is analyzing its private comps, also known as M&A comps or precedent transactions. Here’s a quick overview of how it works.
What are private comps?
The term private comps is short for “private comparables" or privately-owned companies that are similar to one another. A private comps analysis is the act of looking at historical prices for completed deals within the private markets that involve similar companies.
Analyzing private and public comps is similar in concept to how home appraisals work, only public comps are—you guessed it—publicly owned. You start by looking at the property (read: company) you’re trying to assess the value of, then you look for several comparables in the neighborhood to determine how the property you’re appraising stacks up against them based on a series of defined variables.
In the world of business valuations, those defined variables are expressed as financial multiples, averages, ratios and benchmarks. The assumption: The company that’s being valued should have the same—or at least similar—multipliers as its competitors.
Why consider private comps?
Overcoming the difficulty of calculating a valuation and mitigating risk in an investment starts with having the right level of information to be confident in your deal terms.
Comparing private companies in a similar growth stage and industry can provide more clarity than a public market comparable—especially with access to a large amount of valuation data. That’s why extensive private market data, including earnings before interest, tax, depreciation and amortization (EBITDA), pre- and post-money valuations, multiples and deal sizes, are important.
With private market data, strategic investors can develop exit scenarios for different windows of time. This enables them to weigh their options quickly over the course of the investment or hold through the cycle—and be ready to pull the trigger at the right moment to maximize returns.
How private comps analysis works
Here are the steps generally taken when considering private comps:
1. Creating a comps list
Once a strategic acquirer or an investor has a target in sight, they create a list of deals or precedent transactions that are comparable to the one they’re considering pursuing based on the following criteria:
- Deal date
- Types of deals
- Industry and vertical
- Size of company
2. Refining the list
The initial target list is then refined based on even more detailed financial information, including:
- Deal size
- Median capital invested
- Median pre- and post-money valuations
3. Identifying outliers
Finally, additional multiples and ratios such as EBITDA are calculated so outliers can be identified and accounted for.
This process provides analysts a range of valuation multiples to compare their target company to—all based on hard financial data derived from previous transactions in the private markets.
Want to learn more about how you can leverage private market data to mitigate investment risk? Read our full market brief.