What is the first step in using comps and precedent transactions for valuation?

Selecting comparable companies or transactions is indeed the first step in using comps and precedent transactions for valuation. This initial step involves identifying the most relevant peers in the market or past transactions that closely resemble the target company. The idea is to find examples that share similar characteristics or metrics, such as industry, size, growth rate, and geographical focus, which allows for a more accurate comparison.

Once suitable comparables are identified, analysts can move on to the next steps, like calculating financial metrics or applying valuation multiples. However, if the comparables are not appropriately chosen, any subsequent analysis may lead to misleading conclusions. Thus, the selection of comparable companies or transactions lays the foundation for a reliable valuation process, making it crucial for accurate assessments in the context of comparables and precedent transactions.

The other steps mentioned, such as calculating financial metrics and determining maximum value, are dependent on the selection of comparables. Without that initial foundation, these actions would not be meaningful or effective.