How do analysts identify comparables and inputs to use in any given ASC 820 report?
Current guidelines under ASC 820 specify that analysts need to take an exit-focused approach to valuation for illiquid assets. Accordingly, most of the methodology an analyst employs is intended to model the likelihood and likely valuations of different exit scenarios. For venture-funded companies, likely exits typically include acquisitions, IPOs, and liquidation. Because both IPOs and acquisitions are processes that also involve valuations, there is substantial precedent for analysts to lean on—in both of these cases, the valuation is intended to both justify and understand the price at which the company can be sold (either as a whole entity or as a collection of shares) to its buyers. Because of this focus on the possible market participants’ willingness to pay for the company as an asset of their own, the analyst’s perspective in an ASC 820 report is much like a buyer conducting due diligence to inform their own decision to buy or not to buy.
The inputs for an ASC 820 valuation are therefore the same ones as a buyer or an analyst would typically look at when determining the fitness of a price for a security for sale: what progress has this company made? What is its market size? How much are the assets it holds worth? What kind of debt does the company carry? And so on. Every ASC 820 report, and every enterprise value determined within that report, will include some number of these inputs:
- Milestones achieved by the enterprise
- State of the industry and economy
- Experience and competence of the management team and board of directors
- Marketplace and major competitors, including competitive forces
- Barriers to entry
- The company’s proprietary technology, products, or services
- Workforce and workforce skills
- Customer and vendor characteristics
- Strategic relationships with major suppliers or customers
- Major investors and prior investments in the enterprise
- Financial and non-financial performance of the company.
- Enterprise cost structure and financial condition.
- Risk factors faced by the enterprise
ASC 820 provides guidelines for valuing assets at different levels of liquidity. In some cases, they suggest that an analyst use known sales of comparable assets, such as shares in a similarly performing competitive company, to inform their valuation. The list of inputs above is a good representation of the factors that an analyst might use to determine how comparable any given asset is.