Overview
What this model is and what it produces
Comparable Company Analysis (Trading Comps) values a company by applying valuation multiples from similar publicly traded companies. The method derives implied valuation ranges based on how the market values comparable businesses on metrics like EV/EBITDA, EV/Revenue, and P/E. It is the most commonly used valuation methodology in M&A and equity research alongside DCF.
Purpose
Establish market-based valuation ranges by benchmarking against how public markets value similar companies, providing external validation for intrinsic value estimates.
Key Outputs
- Implied Enterprise Value Range
- Implied Equity Value Range
- Implied Price per Share
- Comparable Universe Summary
- Multiple Benchmarking Analysis
- Football Field Valuation Summary
When to Use
- Establishing market-based valuation for M&A negotiations
- Sanity-checking DCF outputs with market observations
- Equity research price target derivation
- Fairness opinion support and documentation
- Quick valuation when detailed projections are unavailable
Why This Model Exists
The problem it solves and where it fits
Problem Solved
DCF relies entirely on assumptions about future cash flows. Comparable Company Analysis anchors valuation in observable market data—what investors are actually paying for similar businesses today. It provides external validation and a market-clearing reference point.
Why Not Simpler Approaches?
Simple revenue multiples ignore profitability. P/E ratios ignore capital structure. Proper comp analysis requires selecting appropriate comparable companies, normalizing for differences, and applying the right metrics for the industry and situation.
Preferred When
- Good comparable companies exist (similar industry, size, growth, margins)
- Market conditions are stable and multiples are meaningful
- Client or counterparty expects market-based validation
- Transaction pricing needs to reflect current market sentiment
- Limited information makes detailed projections unreliable
Trading Comps and Transaction Comps are the foundational valuation methods in investment banking. Most M&A presentations lead with comps analysis before presenting DCF.
How the Model Works
Structure and flow
Select comparable public companies based on industry, size, growth, and margin profile. Gather financial data and calculate valuation multiples for each comparable. Normalize multiples for anomalies (non-recurring items, excess cash). Apply median/mean multiples to the target company's financials to derive implied valuation ranges. Adjust for company-specific premiums or discounts.
Model Sections
Comparable Selection
Identify and justify peer group based on business model, size, geography
Financial Data
Compile revenue, EBITDA, net income, and balance sheet data for comps
Multiple Calculation
Calculate EV/EBITDA, EV/Revenue, P/E, and other relevant multiples
Normalization
Adjust for non-recurring items, accounting differences, capital structure
Benchmarking
Compare target metrics to peer group (growth, margins, returns)
Valuation Application
Apply median/selected multiples to target financials
Premium/Discount Analysis
Justify adjustments based on relative performance
Output Summary
Present valuation range in football field format
- Comparable selection determines relevance of multiples
- Quality of financial data affects multiple accuracy
- Normalization adjustments ensure apples-to-apples comparison
- Target financials must be on same basis as comparables
- Premium/discount rationale must be defensible
Key Drivers & Variables
What matters most for value
Primary Drivers
EV/EBITDA Multiple
very-highMost commonly used enterprise value multiple. Capital structure neutral. Industry ranges vary widely (5-15x).
View variable detailsEV/Revenue Multiple
highUsed for high-growth or unprofitable companies. Important in tech and SaaS valuations.
View variable detailsP/E Multiple
highEquity-level multiple. Affected by leverage and tax rates. Used in equity research.
View variable detailsKey Assumptions Required
- Comparable companies are truly comparable
- Market multiples reflect fundamental value
- LTM vs NTM multiple selection is appropriate
- Target financials are normalized and audited
- No structural changes affecting comparability
Best Practices & Common Pitfalls
How to do it well
Best Practices
Use multiple screens for comp selection
Industry alone is insufficient. Screen for size, growth, margins, geography, and business model.
Present ranges, not point estimates
Show 25th to 75th percentile range. No single multiple captures all uncertainty.
Use both LTM and NTM multiples
LTM is actual; NTM reflects forward expectations. Both provide perspective.
Document comp selection rationale
Be prepared to defend why each company is included or excluded.
Calendarize financials
Ensure all companies are compared on same fiscal year basis.
Common Pitfalls
Cherry-picking comparables
Selecting only comps that support desired valuation. Universe should be objective and defensible.
Ignoring outliers without justification
Outliers may indicate data errors or unique situations. Document reason for exclusion.
Applying multiples to non-comparable metrics
Using EV/EBITDA multiple from capital-light peers on capital-intensive target.
Stale data
Using outdated stock prices or financials. Comps analysis should use recent data.
Pro Tips
- Create a universe with 8-15 companies; show full universe but highlight "most comparable" subset
- Calculate growth-adjusted multiples (PEG ratio) to account for growth differences
- Cross-check with transaction comps—trading comps often imply lower values than deal multiples
- Consider sector rotation—cyclical industries may be at peak or trough multiples
Example Use Case
Applied thinking
An investment bank is preparing a fairness opinion for a mid-cap software company receiving an unsolicited acquisition offer at $35 per share.
Role: Associate in M&A Advisory
Application
The associate identifies 12 comparable SaaS companies, calculates EV/Revenue and EV/EBITDA multiples on both LTM and NTM basis, and applies median multiples to the target. Analysis suggests implied value of $30-$40 per share, with $35 falling within the range.
Insight Generated
Comp analysis validates that the $35 offer is within fair value range, though at the lower end. The board can negotiate for a premium or accept knowing the offer is market-consistent.
Illustrative Data
Comparable Universe
12 SaaS companies
Median EV/Revenue (NTM)
6.5x
Median EV/EBITDA (NTM)
18x
Target Revenue (NTM)
$500M
Implied EV Range
$3.0-3.5B
Implied Share Price
$30-40
When NOT to Use This Model
Know the limitations
No true comparable companies exist
Unique business models, emerging industries, or conglomerates may lack appropriate peers.
Market dislocation or extreme sentiment
During bubbles or crashes, market multiples may not reflect fundamental value.
Private company with different disclosure
Private companies may have different accounting, making direct comparison misleading.
Turnaround or distressed situations
Current multiples are irrelevant when financials are expected to change dramatically.
Consider These Alternatives
Critical Assumptions That Must Hold
- Comparable companies are truly comparable
- Market multiples reflect fundamental value, not sentiment extremes
- Target company financials are on same accounting basis as peers
- No pending events (earnings, M&A) affecting comp multiples
Related Models
Explore connected frameworks
Precedent Transaction Analysis
ComplementaryTransaction multiples often include control premiums vs trading multiples
Coming SoonStandard DCF
ComplementaryDCF provides intrinsic value; comps provide market-based validation
Football Field Summary
ComplementaryPresentation format combining multiple valuation methodologies
Coming SoonSum-of-the-Parts
VariantApplies different comp sets to different business segments
Coming SoonReady to run Comparable Company Analysis?
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