How do the selection of comparable public companies impact my valuation?

We use the list of publicly traded companies that are provided by you to get a sense of how you see your company and the industry. From there, we select a basket that may include these companies or companies that would better reflect the industry, growth trajectory, risks, and financial profile of your company. The main areas that this selection will impact are:

  • Guideline Public Comparable Companies Market Approach Multiples:

We compare the individual Enterprise Value of the selected basket of comparable companies to their respective financial metrics (e.g. revenue, operating profit, earnings, or assets) to determine a range of value-to-financial-metric figures. From there, we compare your companies financial metrics with that of the basket to arrive at an appropriate multiple to use in estimating the value of your company. Note that we only use these value-to-financial-metric figures when the financial metric of your company may be a reasonable basis of value.

  •  Volatility:
    • Volatility is a measure of the degree of variation. In the context of finance and valuation, volatility refers to the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. The higher the volatility, the higher the implied uncertainty (risk, in this context, is both up-side/down-side related). However, it should be noted that the higher the volatility, the higher the possibility of large, positive outcome. An example of this may help:
      • The volatility of the housing market is fairly low: As a physical asset, the value is known and tangible.
      • The volatility of various bets at a craps table is very high: Many results in -100% payout (you would lose your bet), some would double your money, and a few would result in multiples of your initial bet.
    • Ultimately, we use volatility as a measure of uncertainty (and thus risk) in the application of Discount for Lack of Marketability, as well as the application of value allocation through the Option Pricing Model. Various volatilities have a different impact on these considerations.

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