Understand in detail the Guideline Public Company Method (GPCM)

If you are an inventor and want to understand the par value of the share then you must be aware of the Guideline Public Company Method because all the private company shares are not available for viewing by the general public and this is where the Guideline Public Company Method comes into question. But what is the technique all about, let’s understand it in more detail.

Introduction to Guideline Public Company Method

The Guideline Public Company Method is a type of valuation method with the help of which the identification of the prices of the individual shares in a company is done in order to derive the value of the share of the target company. It is essential that the target companies be subject to the same industry dynamics. This method is widely used by the investor to understand the fair value of an organisation.

With the help of these valuation multiples, the companies can easily get an indication as to the value of a share that an investor in the market is ready to pay for a similar line of business. But what are these valuation multiples? Let’s move forward and understand it in more detail.

Valuation Multiple

Valuation multiples are the tools that help in making the comparisons. These multiples are the ratios that help companies to value and measure their business performance financially. The most common and different valuation multiples used worldwide widely are:

• EV to Assets
• EV to Equity
• EV to EBIT
• EV to EBITDA
• EV to Gross Profit
• EV to Net Income

What are the Principles behind the Multiple?

The main principle behind these multiples is that each individual multiple is reflective and ultimately contributes to the value of the entire organisation. The main catch is that this method relies totally on the assumption that the comparable public companies shall be similar to the produce of the equity multiples that ultimately will determine the value.

These multiples produced with this process reflect the true and fair value of the shares as the risks associated with these shares are the current reflection of the market value of the business equity pricing of the target company at a particular date. Lastly, the multiples are adjusted to account for the differences between the private firms that are being valued and the comparable firms in question.

What are the steps involved in the Guideline Public Company?

• Collecting the list of all the Comparable Companies: The first step in the process of the Guideline Public Company Method is to collect the list of comparable companies. Though the number of comparable companies cannot be decided and taken down more closer the comparable companies are the more good results are expected to be tracked down. 

The fewer comparable companies the more the number of companies are required. Identifiable companies can be found based on factors such as industry, growth potential, size and risk profile. If the target companies are different from the available companies’ databases more information and databases are required to be obtained to get a step closer to accurate results.

• Adjusting ratios: The second step in the process is to adjust the ratios of the company in order to make it useful for the subject company. The reason for making these adjustments is because the private companies are smaller and less marketable as compared to the public traded companies therefore the comparable factors have to be narrowed down to make it applicable to the private companies. 

Let’s first understand the important financial characteristics of a Private company. Therefore, the main financial characteristics that need to be considered of a private company are size, profitability, and the historical and projected growth of the organization. 

After understanding the financial characteristics of the private company the rich factors that need to be also taken into consideration are as:

• Regulatory frameworks
• Liquidity
• Geographic factors
• Supplier
• Seasonality
• Customer concentration

• Obtaining Average: Lastly, the average of these adjusted ratios will be taken into consideration and then compared to the subject company.

What are the advantages of the Guideline Public Company Method?

• Obtaining financial data of the organisation: With the help of this method the share quotes of the target company can be derived. Not only the share quotes but also the financial data related to the target company of the closest quarter can also be derived by using this valuation method.

• Easy to use method: One of the main concrete advantages of this method is that the value of the business is derived by using the data set of the comparable companies which are in most conditions available free of cost to anyone on the internet which makes of an easier source for anyone to use this method of valuation.

• Reliable Results: one of the main reasons for using this method of valuation because of the non-listing of the share price of private companies on any of the stock exchanges. This is why it becomes extremely important to hire an independent professional to complete and analyse the value of the company which thereby brings more clarity to the whole valuation.

What are the disadvantages of the Guideline Public Company Method?

• Deviations in the Results: In this method of valuation there are subjectivity issues in the calculation of the adjustments

• Imperfect Comparable Companies: due to the plethora of availability of comparable options there is always a possibility of them being Imperfect and yielding wrong analysis.

• Reliability of the Venture Fund: one of the biggest disadvantages of this method is that the major reliability of the venture fund for accessing the data

• Differences in the Forecast: there may be subjectivity issues in the comparable companies and the target company.

Difference between the Guideline Public Company Method and the Other Methods of Valuation of the Company

The Guideline Public Company Method is that method of the valuation of the business which uses it for the revenue-generating companies. This method of valuation is considered a more reliable, simple, and accessible method of valuation as it uses very limited assumptions by assessing the market data as compared to other forms of valuation such as the discounted cash flow and guideline company transaction method.

If we look at the discounted cash flow method of valuation, it forecasts an organisation’s free cash flows in the future and discounts the same Cash flow in the present. On the other hand, the guideline company transaction method uses relative multiples to determine the value of the company. 

Though this method seems similar to the Guideline Public Company Method this method of guideline company transaction method is based upon the availability of the transactions in the market which sometimes can be difficult to find as they are based upon the market conditions.

How does this method of Guideline Public Company Work?

Directly comparing two organisations is not always accurate because there are various parameters that make the result somewhat different, it is only the accounting ratios that seem a bit more appealing and these accounting ratios can include:

• EV/Revenue: EV stands for the enterprise value to sales and it is calculated by obtaining a company’s enterprise value and then dividing the revenue for a particular period of time. Usually, his period is past 12 months.

• P/E: P/E stands for the earnings per share.in this method, the earnings per share of an organisation are calculated by taking its net income and then dividing it by the average number of the outstanding shares and then lastly dividing the company’s share price by the earnings per share.

Conclusion

The Guideline Public Company Method is a method that is used widely for the valuation of private companies as their shares are not listed on a recognised stock exchange. But the only question that is important is finding similar companies in the industry.

Frequently Asked Questions

Q 1. What is the GPCM method of valuation?

Ans 1. It is the growth method where the multiples are adjusted to reflect the differences in the relevant risks and the other growth prospects.

Q2. What is the GPC approach to valuation?

Ans 2. It is the method that values the business based on the different trading multiples that are derived by taking into account the publicly traded companies working in a similar line of business.

Q 3. How to calculate the value of a public company?

Ans 3. The value of a public company can be calculated by using the formula: valuation = share price * total number of shares.

Q 4. What is the formula for valuation?

Ans 4. The formula for the valuation of an organization is: valuation = share price * total number of shares.

Q5. What are the five methods of valuation?

Ans 5. The five methods of valuation are comparative, residual, investment, profits and cost-based

Q 6. What is method 3 of valuation?

Ans 6. Method 3 of valuation is the transaction value of similar goods.

Q7. What is the best valuation method?

Ans 7. Discounted cash flow is the best valuation method.

Q 8. When to use DDM v/s DCF?

Ans 8. DDM is useful in the case where the organisation pays regular dividends on the other hand DCF is useful in the case where solid cash flows are generated by the companies.

Q9. What is the ROI method of valuation?

Ans 9. ROI is calculated by dividing an investment’s net profit by its initial cost or outlay.

Q 10. Is a 20% EBITDA good?

Ans 10. Yes, because a strong EBITDA is considered in which two times the company’s interest expenses lie.