In the first article of this series, we used a real-world example to show why valuations of the same asset can diverge so sharply. The choice of valuation approach mattered, but so did the assumptions made within any given approach.

Over the next few articles, we turn to one approach in particular: the market approach, and the assumptions that sit at its core.

THE MARKET APPROACH IN BRIEF

Anyone valuing an asset can choose among three internationally recognised approaches: the market approach, the income approach, and the cost approach. An earlier article in this series introduced all three and explained the economic question that each one answers.

The market approach takes its cue from observable prices. It derives the value of an asset from the prices at which that asset, or comparable assets, change hands, or from recent transactions involving the asset itself. Of the three approaches, it is the one that leans most directly on market information.

In practice, prices for the specific asset being valued are often unavailable. Applying the market approach therefore usually calls for two key decisions: first, the selection of suitable comparables, known as peers; and second, the choice of an appropriate adjustment, such as a valuation multiple. This article focuses on the first of these decisions, the selection of comparables.

CHOOSING COMPARABLES: THEORY AND PRACTICE

The market approach rests on a simple economic principle. Similar assets should trade at similar prices among market participants. In a market-based valuation, the priority is therefore to identify one or more comparable transactions that resemble the subject asset as closely as possible. The ideal is a recent transaction in the asset itself. Since that is rarely available, valuers fall back on transactions in comparable assets, adjusting for any differences that remain.

In the context of company valuations, several factors are especially relevant to comparability, and therefore to accuracy. The literature discusses a range of dimensions (such as industry or growth rate) and methods (such as the warranted multiple) that can guide the selection.[1] In practice, peer selection tends to draw on the following dimensions:

• Industry. Companies in the same industry usually face similar market dynamics and cost structures. Classification systems such as GICS, SIC, or the Swiss NOGA codes offer a sensible starting point, though they often capture economic reality only in broad strokes.[2]
• Business model. Closely related to industry is the business model, meaning how and from what a company makes its money. Relevant factors include the nature of value creation (a pure trading business versus a vertically integrated one, for instance), strategic positioning (such as a premium offering), and the target customer (such as B2B).
• Financial metrics. Good peers should be of a similar scale (revenue, total assets) and show comparable growth rates, profit margins, and capital structures. Large differences in these value drivers can distort the resulting multiple and lead to a flawed read-across to the company being valued.
• Geographic and regulatory context. Companies in different countries operate under different tax systems, accounting standards (IFRS versus Swiss GAAP FER, say), and macroeconomic conditions. These differences need to be reflected in the choice of peers and, where appropriate, in explicit adjustments.
• Adjusting for one-off effects. To create a clean basis for comparison, the financial figures of the peers should be stripped of one-off items such as large acquisition costs, restructuring charges, or extraordinary gains.

A pure-play comparable, identical to the subject company across every dimension, almost never exists in practice. What matters is finding companies that, taken as a whole, present the most consistent possible risk and value profile. Both the inclusion and the exclusion of any company should be reasoned transparently.

A further trade-off follows close behind: the number of comparables. A small group of very similar peers maximises comparability, but it leaves the result exposed to outliers or the special circumstances of a single company. A larger, broader group adds stability, but at the cost of comparability.

WHOLE FOOD AI AG: AN ILLUSTRATION

To show what peer selection means in practice, consider a fictional company, WholeFood AI AG. This Swiss business operates in food processing and has invested heavily in artificial intelligence over recent years. AI algorithms now optimise the entire value chain, from sourcing raw materials and developing products to dynamic pricing and demand forecasting. The company is privately held and is planning a listing in Switzerland.

To estimate its enterprise value, we apply a multiples approach based on the EV/EBITDA multiple, which controls for differences in earnings across the comparable companies. In effect, this multiple assumes that, within the peer group, higher earnings before interest, taxes, depreciation, and amortisation (EBITDA) go hand in hand with a higher enterprise value (EV). WholeFood AI AG has EBITDA of CHF 100 million. At an EV/EBITDA multiple of six, its enterprise value would come to CHF 600 million. Determining that multiple raises the central question:

Which companies are the right comparables for valuing WholeFood AI AG?

For this example, our interactive valuation tool lets you build different peer groups by selecting industry, company size, and location, and to see the effect on enterprise value at once. For WholeFood AI AG, several peer groups can be constructed, and they lead to fundamentally different results:

The figures make the point clearly. It is not the valuation model itself but the economic judgment about the relevant peer group that drives the outcome. Using the peer group of small and mid-sized food processors, enterprise value would be around CHF 700 million. Using the peer group of North American AI and technology companies, it would be close to CHF 1.9 billion.

CONCLUSION

The WholeFood AI AG example shows that selecting comparables in the market approach is far more than a technical formality. It is a fundamental economic judgment. Which market does the company belong to? What growth and risk should be attributed to it? Which macroeconomic and regulatory conditions does it face? The answers shape the multiples used, and with them the value that emerges.

As the interactive tool demonstrates, both the choice of industry and the choice of specific peers within an industry can produce sizeable differences in value. Several things therefore matter:

• Selecting peers that are genuinely comparable in business model, growth profile, profitability, and risk structure.
• Reasoning the selection transparently and consistently, with an explicit account of which companies were included and which were deliberately left out.
• Testing how robust the valuation is, for example through sensitivity analyses that vary outliers and the composition of the peer group.
• Tying the analysis of comparables to a company and industry analysis, so that the selection stands up to economic scrutiny.

A carefully reasoned peer selection strengthens not only the methodological quality of a valuation but also its defensibility, whether in a transaction, a regulatory proceeding, a tax ruling, or before a court.

In the next article, we turn to the second key building block of the market approach: the choice of the appropriate adjustment factor, and why small differences here, too, can carry large consequences.

SOURCES

[1] See Alford, A. W. (1992). The Effect of the Set of Comparable Firms on the Accuracy of the Price-Earnings Valuation Method. Journal of Accounting Research., Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. 3rd ed. Wiley. or Bhojraj, S., Lee, C. M. C. (2002). Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms. Journal of Accounting Research.

[2] Hoberg, G., Phillips, G. (2016). Text-Based Network Industries and Endogenous Product Differentiation. Journal of Political Economy.

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