The Guideline Company Set That Is Too Small and Too Clean
You are valuing a 100% equity interest in a regional HVAC services company (revenue $14M, EBITDA $1.8M) using the market approach. You identify six guideline public companies. After screening, two are eliminated (one is a manufacturer, one is in bankruptcy). The remaining four trade at EV/EBITDA of 7.1x, 8.4x, 9.0x, and 11.2x. The 11.2x company is a national platform with 40% of revenue from recurring maintenance contracts; your subject has 12% recurring revenue and a customer base concentrated in three builders (58% of revenue). The 7.1x company has declining revenue and a leveraged balance sheet. You also have two transaction comps: one at 6.8x (2019, pre-COVID) and one at 9.6x (2022, strategic buyer). The subject has no debt and $1.1M in cash. Management wants the 11.2x multiple applied because "we are a market leader in our region."
1. Select and justify the multiple(s) you will apply. Address the outlier treatment and the recurring-revenue and concentration differences.
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Screening logic:
- The 11.2x platform is not comparable on the drivers that matter: 40% vs. 12% recurring revenue is a structural margin/durability difference, and a national platform carries scale and diversification the subject lacks. Applying 11.2x would import a premium the subject has not earned. Down-weight heavily or exclude.
- The 7.1x company is distressed (declining revenue, leverage). Its multiple reflects risk the subject does not have. Down-weight or exclude.
- The 8.4x and 9.0x companies are the cleanest comparables - similar size band, no obvious distress, no platform premium.
Transaction comps:
- The 2019 6.8x is stale and pre-COVID; use only as a floor/sanity check.
- The 2022 9.6x is a strategic buyer - strategic premiums are real but not available to a financial buyer. Use it as a ceiling reference, not the point estimate.
Selected range: roughly 8.0x–9.5x, centered near 8.5x–9.0x, with the strategic transaction supporting the top of the range.
Concentration: three builders at 58% of revenue is a material risk. This argues for the lower half of the range or a separate company-specific risk adjustment in the discount rate (if using the income approach as a cross-check). Do not ignore it because the multiples "look fine." A buyer will price it.
2. Management argues for 11.2x. How do you frame the response, and what cross-check would you run?
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Framing: The 11.2x is a data point, not a conclusion. The question is not "what does the best company trade at?" but "what would a buyer pay for this company?" The gap between 11.2x and ~8.5x is explained by identifiable, quantifiable differences (recurring revenue mix, scale, customer concentration). If management wants the higher multiple, they must show the subject has those attributes - it does not.
Cross-check - income approach: Build a DCF or capitalized-earnings model. If the income approach lands near 8.5x–9.0x, that corroborates the market conclusion. If it lands at 11x, investigate why (e.g., growth assumptions too aggressive, discount rate too low). Convergence of two approaches is far more defensible than either alone.
Also cross-check the implied price: 8.5x × $1.8M = $15.3M EV; + $1.1M cash − $0 debt = $16.4M equity. Sanity-check against revenue ($14M) - an implied ~1.1x revenue is plausible for a services business. If the implied revenue multiple looks absurd, revisit.
Documentation: Record why each comp was included, excluded, or down-weighted. A reviewer must be able to reproduce your selection.
3. What if the two transaction comps were the *only* market evidence available and the public companies were all eliminated?
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Then the market approach is weak, and you must say so. Two data points - one stale (2019) and one strategic (2022) - are insufficient to establish a reliable multiple range on their own. Options:
- Widen the range and disclose the limitation. Use 6.8x–9.6x as a broad bracket, but flag low confidence.
- Weight the income approach more heavily and use the transaction comps only as a reasonableness check.
- Consider whether a market approach is even appropriate given the evidence. Standards do not require every approach; they require that you explain why an approach was used, weighted, or rejected.
Do not manufacture precision from two points. Presenting "8.2x" as a conclusion from a 2019 and a 2022 deal would be false precision and would not survive scrutiny. The professional move is to state the limitation explicitly and let the weight shift to the better-supported approach.