What it means
The comparables method, usually shortened to "comps", rests on one plain idea: similar assets should command similar prices. If four logistics businesses of roughly the same size, growth rate and margin profile are valued at around eight times their annual earnings, a fifth one probably sits somewhere near that too.
For a founder, a chief executive or a manager sitting in a board meeting, comps are normally the first answer to the question of what the business is worth. They set the anchor in an acquisition negotiation, in a funding round, in a share option scheme and in any conversation with a lender about how much collateral value the company represents.
In practice you build a peer set of roughly five to ten businesses that share the target's industry, scale, growth and profitability, then calculate the same multiple for each. The usual choices are enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation), enterprise value to revenue, and price to earnings.
Most analysts take the median rather than the average, so a single odd peer does not drag the whole answer sideways. The judgement lives in the peer set, not in the arithmetic.
Swap two peers in or out and the median multiple can move by a full turn, changing the valuation by millions, which is why careful analysts write down why each comparable was included and why the near misses were excluded. Two flavours are worth keeping apart.
Trading comps use the prices of listed companies as the market values them today, while transaction comps use prices actually paid in completed acquisitions. Transaction comps normally come out higher because acquirers pay a premium for control, so blending the two without flagging the difference produces a range that quietly overstates value.
In practice
Real-world examples.
Example
A family-owned bakery chain is approached by a private equity buyer. The owners pull the multiples paid for three similar regional food businesses over the past two years, find they clustered around 6x EBITDA, and use that to push back on an opening offer pitched at 4x.
Example
A software company preparing a Series B round builds a comps table of listed subscription businesses growing at 30% a year, which price at about 7x forward revenue. The founders apply a discount for being private and smaller, land at 5x, and go into investor meetings with a defensible number.
Example
A commercial landlord valuing a warehouse before refinancing looks at four comparable industrial units let on similar leases in the same corridor, all sold at yields between 6% and 7%. The bank's valuer uses the same set, which shortens the negotiation considerably.
Think of it
“Comparables value a company by looking at what similar companies are worth-pricing by comparison.
Formula
Calculation
Enterprise Value = Valuation Metric x Peer Group Multiple
Equity Value = Enterprise Value - Net Debt
A regional logistics company earned EBITDA of $4,000,000 last year. Four listed peers trade at enterprise value to EBITDA multiples of 7.5x, 8.0x, 9.5x and 11.0x. The median is the midpoint of the two middle values: (8.0 + 9.5) / 2 = 8.75x.
Enterprise Value = $4,000,000 x 8.75 = $35,000,000.
The company carries net debt of $5,000,000, so:
Equity Value = $35,000,000 - $5,000,000 = $30,000,000.
Sensible practice is to show the range rather than a single point. At the lowest peer multiple of 7.5x the equity value is $4,000,000 x 7.5 = $30,000,000 less $5,000,000 of net debt, or $25,000,000. At the highest multiple of 11.0x it is $44,000,000 less $5,000,000, or $39,000,000. So the comps support a range of roughly $25,000,000 to $39,000,000, with a midpoint estimate of $30,000,000.Case study
Seen in the real world.
This is an illustrative, fictional example. Northwind Ceramics, an invented mid-sized tile manufacturer, wanted to sell a minority stake to fund a new kiln. Its finance director produced a valuation of $52,000,000 by applying a 13x multiple drawn from three fast-growing branded homeware companies.
The prospective investor built a different peer set: four industrial tile and building-products manufacturers with similar margins and growth, which traded at a median of 8.75x. On Northwind's EBITDA of $4,000,000 that produced an enterprise value of $35,000,000, well below the number in the pitch deck.
The gap was not an arithmetic dispute; it was a disagreement about which businesses Northwind actually resembled. The two sides eventually agreed on a peer set that included one branded player and three industrial ones, settled at a 9.5x multiple, and closed at an enterprise value of $38,000,000. The lesson from this fictional deal is that the peer set is the negotiation.
Watch out
Common mistakes.
- Choosing comparables by industry label alone, so a slow-growing hardware reseller ends up benchmarked against high-growth technology names that share nothing but a sector code.
- Confusing enterprise value with equity value, and forgetting to subtract net debt before telling shareholders what their stake is worth.
- Presenting a single number rather than a range, which hides how sensitive the answer is to the choice of multiple.
Questions
People also ask.
How many comparables do I need?
Five to ten is the usual working range; fewer than three makes the median unstable, and more than about a dozen usually means you have started including businesses that are not genuinely similar.
Why use the median instead of the average?
Because one peer with a temporarily depressed profit can produce an enormous multiple that pulls the average far away from where the market really sits.
Can the comparables method be used for a loss-making company?
Yes, but you switch to a revenue or user-based multiple, since a multiple of negative earnings is meaningless.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%