What Is the Guideline Public Company Method in Valuation?

The Guideline Public Company (GPC) Method is one of the more popular valuation methodologies because people often hear about it in the news or in presentations. This method identifies prices for individual shares of publicly traded companies that are subject to the same industry dynamics as the subject company (the company you are trying to value).

The valuation multiples calculated from these companies provide an indication for how much a current investor in the marketplace would be willing to pay for similar situated company that we are trying to value. For comparison sake we might be looking at things like similar businesses, sizes, geographic regions, and other operating characteristics.

Is the GPC Method Appropriate for Middle Market Businesses?

Depending on the size of the subject company, using the GPC method can be hard to implement realistically. Many middle market companies are better suited for the completed transaction method or the Discounted Cash Flow (DCF) approach. However, for some industries such as cloud or information technology, GPC data can be very robust and indicative of what’s going on in the industry, even for smaller-sized companies.

Selecting Guideline Public Companies

There are a number of resources both paid and free that we use to identify guideline companies.

  1. Cap IQ – This is a paid resources that provides research and analysis on publicly traded companies and overall market awareness. You’ll be able to use the Cap IQ database and tools to identify a list of companies that are similar to the one you are trying to value.
  2. Securities and Exchange Commission – The SEC has a search tool called EDGAR that allows you to search by industry code and provides a list of all public companies that characterize themselves as being in that industry. This typically generates a lot of results which you’ll need to narrow down in order to make sure the public companies are really comparable to the subject company.
  3. Yahoo Finance / Google Finance – These online tools provide key data on publicly traded companies. Once you find a few good comps for your subject, you can look up their competitors on Yahoo or Google Finance and start developing your list of GPCs that way.

How Many Companies Do You Need?

For a good GPC you need at least five public companies in your comp set; we prefer to have at least 10. It provides for a lot more analysis for the range of industry multiples. I’ve seen as many as 30 companies used, but bigger is not necessarily better. When using the GPC method, you really have to ask, “Is the subject company really comparable to these public companies?” And if this causes you to whittle down your comp set to five or six companies, that’s fine.

Photo Credit: Jorge Franganillo via Flickr cc

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