Should the target company being valued be included in its own peer group?

The idea behind excluding the target company from its own peer group is that including it can lead to skewed results in valuation multiples. When a company is part of its own peer group, its financial metrics such as revenue, EBITDA, or net income will directly influence its performance metrics, leading to distortion in perceived value.

For example, if a company is valued using EBITDA multiples, its own EBITDA would contribute to the average multiple of the peer group. This can create an artificial inflation or deflation of its valuation compared to similar firms that are not benefitting from this self-inclusion. Analysts typically want to assess how the target company stacks up against its true competitors, without the potential bias of its own metrics. A more accurate and objective comparison can be drawn by using a peer group that does not include the target company to determine a fair market value.

In this way, excluding the target company helps maintain the integrity of the comparative analysis and ensures more reliable and realistic business evaluations.