Comps & Precedent Transactions
The Hook
The fastest way to value almost anything is to ask what similar things sold for. Real estate agents do it, and so do dealmakers. Learn how to value a company by its peers, and you can put a credible number on a business before a spreadsheet is even open.
Plain English
There are two market-based ways to value a company, and they are cousins. Trading comps, short for comparable companies, look at how the stock market prices similar public companies right now. You find businesses that look like the one you are valuing (same industry, similar size and growth), see what multiple of earnings the market pays for them, and apply that multiple to your company. Precedent transactions do the same thing but with completed deals: you look at what buyers actually paid for similar companies in recent acquisitions, and you use those deal multiples instead. The key difference is the source of the multiple. Comps come from today's live market prices. Precedent transactions come from real deals that closed, and those usually carry a control premium, the extra a buyer pays to own and run the whole company. That premium is why precedent transaction multiples tend to be higher than trading comps. Neither method is the truth. They are reality checks, ways to ground a valuation in what the world is actually paying.
The Math
Both methods follow the same three steps. Pick a comparable set, find the multiple those comparables imply (usually Enterprise Value divided by EBITDA), and apply that multiple to your company's EBITDA. The only difference is where the multiple comes from: live market prices for comps, or closed deals for precedent transactions.
- Comparable multiple = Enterprise Value of the comparable / its EBITDA
- Your valuation = your EBITDA x the chosen comparable multiple
- Precedent transactions usually include a control premium, so their multiples tend to run higher than trading comps
You want to value a company with EBITDA of 10,000,000 dollars. You find three similar public companies and calculate each one's multiple by dividing its Enterprise Value by its EBITDA. Company X: 80,000,000 / 10,000,000 = 8.0 times. Company Y: 120,000,000 / 12,000,000 = 10.0 times. Company Z: 54,000,000 / 6,000,000 = 9.0 times. The average is (8.0 + 10.0 + 9.0) / 3 = 9.0 times. Applying that to your company: 10,000,000 x 9.0 = 90,000,000 dollars. You now have a market-grounded valuation, built entirely from what investors pay for similar businesses today.
Same company, 10,000,000 dollars of EBITDA. Now you look at three recent acquisitions of similar businesses, and you calculate the multiple each buyer actually paid. Deal 1: paid 11.0 times EBITDA. Deal 2: paid 12.0 times. Deal 3: paid 10.0 times. The average is (11.0 + 12.0 + 10.0) / 3 = 11.0 times. Applying it: 10,000,000 x 11.0 = 110,000,000 dollars. Notice it is higher than the 90,000,000 from trading comps. The gap, 20,000,000 dollars, is largely the control premium: buyers pay extra to own the whole company outright. This is the normal pattern, and knowing to expect it keeps you from being surprised when deal multiples come in rich.
The method is only as good as the comparables. Suppose you are valuing a steady, slow-growth manufacturer at 10,000,000 dollars of EBITDA, but you mistakenly include a high-flying tech company growing 40 percent a year that trades at 20 times EBITDA. That one outlier drags your average up. With three sensible comps at 8, 9, and 10 times, the average is 9.0 times, giving 90,000,000 dollars. Add the 20 times outlier and the average becomes (8 + 9 + 10 + 20) / 4 = 11.75 times, giving 117,500,000 dollars. You just overvalued the business by 27,500,000 dollars by including a company that is nothing like it. The discipline is in choosing genuinely similar comparables, and being ready to defend why each one belongs.
The Lingo
- Trading comps
- Valuation based on the multiples that similar public companies trade at in the market right now.
- Precedent transactions
- Valuation based on the multiples buyers actually paid in recent acquisitions of similar companies.
- Comparable set
- The group of similar companies or deals you choose to base the valuation on. Choosing it well is the whole game.
- Control premium
- The extra amount a buyer pays to own and control a whole company, which makes deal multiples run higher than trading multiples.
- EV / EBITDA multiple
- Enterprise Value divided by EBITDA. The most common multiple used to compare how companies and deals are priced.
- Outlier
- A comparable that is unlike the rest and distorts the average. The reason you screen comparables carefully before trusting the number.
Practice
In the Room
The Trap
Choosing comparables that are not truly comparable. It is tempting to include an exciting, high-multiple company to lift the valuation, but a peer growing far faster, or in a different business entirely, will distort the average and produce a number you cannot defend. The discipline is to pick genuinely similar companies on industry, size, growth, and margins, and to be ready to explain why each one belongs. When in doubt, drop the outlier and note why.
Quick Check
Q1.What is the main difference between trading comps and precedent transactions?
Q2.Why do precedent transaction multiples usually run higher than trading comps?
Q3.Three comparable companies trade at 8, 9, and 10 times EBITDA. Your company has EBITDA of 10,000,000 dollars. Using the average multiple, what is the valuation?
Q4.A comparable company has an Enterprise Value of 120,000,000 dollars and EBITDA of 12,000,000 dollars. What multiple does it imply?
Q5.You are valuing a slow-growth manufacturer and notice one comp is a tech firm growing 40 percent a year at 20 times EBITDA. What should you do?
Practice Out Loud
You valued a company at nine times on trading comps, but a colleague insists recent deals justify twelve times. In 60 seconds, explain the role of the control premium and where you would set your range. The AI will play the colleague, who pushes back with: so are you saying our valuation is too low?
Try it in real life
This week, pick one company you follow and find one real world example of comps & precedent transactions. Write down what you noticed in two sentences.
Wrap up this lesson
Submitting the Quick Check counts. Or mark it here when you feel ready.