What it means
Comparables analysis rests on a plain idea: similar things should sell for similar prices. If five listed companies in your sector each trade at around ten times their profit, a sixth company with the same economics ought to be worth roughly ten times its profit too.
The method is quick, transparent and easy to explain to a board, which is why it is used so widely. Building a comparable set is the part that requires judgement.
You screen for companies with the same business model, similar size, similar growth, similar margins and similar customer base, then discard the ones that only look alike from a distance. A subscription software company and a software reseller both sell software, but their economics are so different that pairing them produces a misleading answer.
Once the set is agreed, you calculate the same multiple for each peer and look at the spread. Analysts normally quote the median and the range rather than a single number, because the honest output of a comparables exercise is a band of values, not a point.
Where your company sits inside that band should be justified by something real, such as faster growth or a stronger margin. Comparables are used far beyond company valuation.
Estate agents price a house from recent sales on the same street, human resources teams benchmark salaries against similar roles at similar employers, and procurement teams compare supplier quotes against market rates. In every case the discipline is the same: define what similar means, then be honest about the differences.
The weakness of the method is that it inherits whatever the market currently believes. If an entire sector is overpriced, comparables will faithfully tell you that your company is worth a lot too.
That is why serious valuations pair comparables with a cash flow based method, so an optimistic market mood does not go unchallenged.
In practice
Real-world examples.
Example
A marketing agency owner wants to know what her business is worth before approaching buyers. Her accountant benchmarks three listed agency groups trading at around 8 times EBITDA, then applies a discount for the smaller size and single-client concentration, landing on a range of 5 to 6 times.
Example
A pension fund reviewing a commercial property in a regional city asks for comparables. The valuer produces four office sales on adjoining streets within the last nine months, all between $310 and $340 per square foot, and prices the building at $325 per square foot.
Example
A head of people is challenged on why a senior engineer's offer is $145,000. She presents comparable salary data for the same role at four similar-sized technology employers in the same city, showing a median of $142,000, and the offer is approved.
Formula
Calculation
Implied enterprise value = peer group median multiple x your company's matching metric.
Five listed peers trade at enterprise value to EBITDA multiples of 8.0, 9.0, 10.0, 11.0 and 12.0 times. Ranking them and taking the middle value gives a median of 10.0 times.
Your business earns EBITDA of $6,500,000, so the implied enterprise value is 10.0 x $6,500,000 = $65,000,000. Subtracting net debt of $15,000,000 gives an implied equity value of $65,000,000 - $15,000,000 = $50,000,000. Spread across 2,000,000 shares, that is $50,000,000 / 2,000,000 = $25.00 per share.Case study
Seen in the real world.
This illustrative and fictional case follows Brindlewood Pet Supplies, a chain of thirty stores whose board wanted an internal view of value before opening talks with an investor. The finance team assembled eight listed speciality retailers and calculated a median of 6.4 times EBITDA across the group.
The first draft looked encouraging until the audit committee asked why two of the eight peers were online-only businesses growing at 30% a year. Removing them dropped the median to 5.1 times, which was a less flattering but far more defensible figure for a store-based chain growing at 4%.
The board went into negotiation quoting 5.1 times as the base and arguing for a premium based on freehold property and above-average store margins. The discipline of defending the peer set, rather than simply picking the highest multiple available, made the eventual conversation with the investor much shorter.
Watch out
Common mistakes.
- Choosing peers that flatter the answer rather than peers that genuinely match the business model, growth rate and size.
- Quoting a single multiple as though it were precise, when the honest output of the exercise is a range with reasoning attached.
- Mixing metrics, for example applying an enterprise value multiple to a net profit figure, which produces a number with no meaning at all.
Questions
People also ask.
What is the difference between comparables and comparable transactions?
Comparables usually means current market prices for similar companies, while comparable transactions means prices actually paid in completed acquisitions.
Should you use the mean or the median?
The median, because it is far less sensitive to one unusually cheap or expensive peer distorting a small sample.
Do comparables work for loss-making companies?
Partly; profit multiples become useless, so analysts fall back on revenue multiples or operating metrics such as subscribers or square footage.
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