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Chapter 11. Market Approach-Public Company Method
The following is an excerpt from The Executive's Guide to Business Valuation by valuation expert and M&A i-banker Justin Kuczmarski, MBA, CPA, CVA, CIRA, ABV. To view this free, 300-page guidebook, please click the blue link above to download.
Chapter 11. Market Approach - Public Company Method
The Ideal Number of Public Companies
A popular question often asked is "what is the best number of comparables?". This question can also be directed to the second market approach, the M&A Method.
Most investment bankers and valuators are not stubbornly opposed to selecting a single-digit level of comparable companies. A lower amount of selected guideline comparables is sufficient if there are strong quantitative and qualitative similarities amongst the subject firm and most (if not all) public company comparables. Investment bankers often automatically present 10 companies and then highlight two at the bottom of the page. This additional emphasis is conducted to drive home the range depicted in either the 10 public company multiples or the 10 comparable transaction multiples.
Irrespective of the total number of comparable public companies or transactions, the key point to remember in reviewing the valuator‘s list of comparables is the level of documentation. For instance, the valuator should disclose an extensive array of reasons why the public company justifies a guideline comparison to the subject company. In the M&A Method, the same logic also applies to valuation pricing multiples sourced from private and public transactions. In sum, the mantra of garbage in, garbage out is vital.