Guideline Public Company Method
What is the Guideline Public Company Method?
The GPC Method is a market approach method whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market.
To execute this approach, we will select and analyze a basket of comparable publicly traded companies. When appropriate as a measure of value, we would assess the individual and range of revenue and EBITDA multiples of these public companies and apply an appropriate multiple to the historical or forecasted revenue and EBITDA of the subject company.
As an example, many early stage, but publicly traded, development biotech companies are generating little to no revenue. Thus, using a multiples method whereby we look at the value of that company vis-a-vis its revenue would make little sense. In this example, the revenue or the EBITDA is not an appropriate measure of value.
How are the public comparables selected?
A significant limitation of the GPC methods is that "true" comparables are unlikely to exist, particularly in valuing privately held, early-stage enterprises. Another limitation arises if the enterprise being valued has no earnings or immaterial revenue because forecasts of financial statement amounts may then be highly speculative. Either way, we assess the company’s geography, industry, business operations, size, stage of development, prospects for growth, and risk.
When is it appropriate to use the GPC method?
Methodologies used are a function of the purpose of the valuation, the scope, the hierarchy of signals available, and other facts and circumstances. As an example: the value of a 1,000 sq ft apartment in New York City is $1M, or $1,000 / sq ft. However, we rarely take this $1,000 / sq ft multiple and blindly apply it to other apartments to assess their value. A penthouse in Tribeca would require a higher multiple, whereas a pre-war building in the Bronx is much lower.
This is a simple example of a hard-asset. The complexities are exponential when considering the market approach for companies with significant intangible assets. As you can imagine, when selecting multiples, it’s important to consider various factors (such as geography, industry, business operations, size, stage of development, prospects for growth, and other risks).