409A Valuation Report Components – Industry and Competitor Analysis
The industry and competitor analysis portions of a 409A report review a company’s current market position and assess the environment in which the company is operating. This allows for the valuation of the company to be considered in the operating environment of the market.
There are several sources to leverage when researching the industry for a company. The first step is to identify and define the correct industry. For US based companies the two most accepted industry classifications are the Standard Industry Classification (SIC) and the Global Industry Classification Standard (GICS).
Once the industry has been identified the analysis of the operating environment focuses on factors that impact the specific industry. Some of the factors impacting the industry, beyond those covered in the economic environment section of the report, include customers, suppliers, substitution products/services, access to capital, and government. Frameworks can be leveraged for an organized approach to this analysis. One commonly recognized framework is Michael Porter’s 5 forces, which focuses on the factors driving rivalry within an industry. Sources to leverage for the industry analysis include current news articles, studies, and published reports. It is important to ensure that the publication date is in line with the valuation date and that the sources being used are reputable.
Identifying and understanding a company’s competitors is important when valuing a company for several reasons. Successful competitors can threaten a company’s access to customers and impact the long-term growth of a company, nascent companies or technologies can make current products and services obsolete, and competitor companies can be used as Guideline companies when utilizing the market approach for determining the fair market value of a company.
The problem with solely relying on a company’s own assessment of its competitors is that, surprisingly, many companies have not done a full competitive analysis of their own market. Or if they have, they have only focused on direct and established competitors. Direct competitors are usually easy to identify, they are the companies offering the same product or service as those produced by the company. To understand a company’s position in the market however, a broader scope beyond direct competitors needs to be considered. Are there indirect competitors out there who produce a product/service that meets the same customer needs as those that company meets, but through a different product/service? Are there indirect competitors out there who are working on producing a product/service that could render the company’s offering obsolete? These are all factors to consider when analyzing the competitive environment for the company.
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