What should you avoid when selecting comparable companies and precedent transactions?

When selecting comparable companies and precedent transactions, it is crucial to constrict the set of potential comparables based on relevant financial metrics as well as equity and enterprise value to ensure that the analysis is reflective of the specific company being evaluated. However, it is important to avoid overly constricting the selection criteria since this can lead to a very limited set of comparables that may not provide a reliable valuation.

Constriction based solely on a few specific financial metrics or on narrow ranges of equity or enterprise value may eliminate valid comparables. This could result in biases that do not accurately capture the market's valuation of a company with similar operational characteristics or growth potential. Therefore, while some level of constriction is necessary to ensure relevance, excessively tight constraints diminish the robustness of the analysis.

In contrast, screening solely by revenue, using multi-year averages, or making comparisons across different industries—all have their own places in the process, although care must be taken to ensure the relevance of the selected companies or transactions in relation to the subject of evaluation.