In order to determine your business valuation, you first have to consider your standing in relation to other comparable companies on the market. In business comps terms, this is what’s known as a “peer group” or “peer universe,” and the other businesses or firms you choose for comparison will influence the outcome of your comps valuation.
If you’re one of a dozen specialty doughnut shops in Small Town, USA, then finding other equities for comparison shouldn’t be difficult. But what if you’re a one-in-a-million enterprise cooking up business in an unprecedented new way? What if your company is so unique that you don’t yet have any direct competitors with comparable transaction? Luckily, you can still compile a peer group for a proper business appraisal valuation using some other characteristics. Consider these five factors before diving into your business comps:
Compare like with like and consider your business in relation to others in your field. While you might prefer to think of your company as a unique special snowflake, there are 26.5 million other businesses in the United States alone, with over half a million new ones starting up every month. Chances are, there’s someone out there with a similar service. Otherwise, expand your notion of “industry”: If you sell customized dog food bowls, for example, you can think of your field in relation to manufacturers of dog collars or leashes, dog toys, or doggie waste bags, too.
- Consumer Base
Along with your industry, think of any overlap you might have in consumer base with other fields. People who buy cut flower bouquets, for example, might be more likely to purchase ceramic vases, and vice-versa. Placing your company in line with similar demographic target areas will help nuance your business comps.
There’s no sense comparing your three-person team with a giant conglomerate, even if you operate in the same line of work. The number of employees and the scope of your operations are an extremely important consideration when determining the valuation of your business; bigger isn’t always better.
Especially if your company provides local or specialized services, the region where you work can be highly influential in selecting a comparable peer group. Air conditioning service providers in Florida, for instance, will have very different models from those in Maine. Think about the geographical limits of your enterprise, whether it’s by city, state, country, continent, or hemisphere.
- Growth Characteristics
Finally, your company’s prospects for future growth will certainly have a bearing on your business comps, so it’s important to have a peer group with like potential. This can be one of the most difficult factors to determine of other companies, so seek out information on other business’ histories or return on invested capital. If you’re in a newly-emerging tech field, you won’t want to compare yourself with a stagnant, steady business model in hairdressing supplies.
Ultimately, a comparable company analysis valuation starts with determining just who those comparable companies might be. Once you’ve considered all the factors, compiled the necessary information, and truly thought about why you might need a business valuation, then you can work with an appraisal service to get a truly accurate picture of just what you’re worth.