Step One: Identifying the Peer Group of Comparable Companies
Your analysis and understanding of the business of the target company will allow you to identify companies within an appropriate peer group. To identify the “universe” of comparables, you should consult other bankers, SEC filings, and a wide range of other data sources. The ultimate set of comps is usually a group of 5 to 10 companies from the same industry that are most similar to the target in terms of their business, production, marketing, and financial characteristics. The following are key factors to consider when identifying comparable companies:
- • Business sectors. Recognizing the specific industry, or sector, to which the target company belongs is essential to making an accurate comparable companies analysis. Sectors help to tell us much about the company’s expectations, opportunities for growth, and overall outlook. Furthermore, many companies can be placed in specific subsectors within broader categories. These will help bankers more readily identify the best and most relevant comparable companies. For instance, within the manufacturing sector, there are more specific sectors, such as automotive, clothing, computers, and toys.
Note: On occasion, you may be required to consider the relevance of a so-called niche market. A niche market is a small piece of a larger market. The characteristics of niche products and services are defined by the specific needs of the niche market. A niche market is often described as a situation where a new business can come into an established market and make money from a specific piece of that market without causing losses to the major competitors in the large market. Because of their specific nature, suitable comps are often not available. When it is necessary to expand the universe of available comps, it is best to pick other niche businesses with similar financial ratios from a different market. Other possible comps include busines