After the DCF, comparable company analysis ("trading comps") and precedent transaction analysis ("transaction comps" or "deal comps") are the other two pillars of the valuation toolkit. Every IB interview will test whether you understand how these work and when to use which.
Trading Comps: The Process
Trading comps value a company by comparing it to similar public companies. The logic is simple: if comparable businesses trade at 10x EBITDA, and your company generates $100M EBITDA, it's worth approximately $1B.
Step 1: Select the Peer Universe
Choose 5-15 comparable public companies based on:
- Industry/sector, Same industry classification
- Size, Similar revenue and market cap
- Geography, Same market or region
- Growth profile, Similar revenue growth rates
- Margins, Comparable operating margins
- Business model, Similar product/service mix
RED FLAG: Many candidates pick comps that are too broad. "They're both tech companies" isn't a comp rationale. A cloud SaaS company and a hardware manufacturer are both "tech" but have completely different economics.
Step 2: Gather Financial Data
For each comp, collect:
- Current share price and market cap
- Enterprise value (EV)
- LTM (Last Twelve Months) and forward financials: Revenue, EBITDA, EBIT, Net Income
- Growth rates and margins
LTM vs. Forward: LTM is backward-looking (actual results). Forward uses analyst consensus estimates. Forward multiples are generally more relevant because they reflect expected performance.
Step 3: Calculate Multiples
Common trading multiples:
| Multiple | Formula | When to Use |
|---|---|---|
| EV/Revenue | EV ÷ Revenue | Pre-profit companies, high-growth |
| EV/EBITDA | EV ÷ EBITDA | Most common, capital-structure neutral |
| EV/EBIT | EV ÷ EBIT | When D&A varies significantly across comps |
| P/E | Price ÷ EPS | Mature, stable earnings companies |
| P/BV | Price ÷ Book Value | Financial institutions |
Step 4: Analyze and Apply
Calculate mean, median, and range of multiples across the comp set. Apply to the target company:
Example: Median EV/EBITDA of comps = 11.5x. Target EBITDA = $200M.
Implied EV = 11.5 × $200M = $2.3B
Subtract net debt to get implied equity value. Divide by diluted shares for implied share price.
Always present a range, not a single number. Use the 25th-75th percentile of the comp set to establish a valuation range.
Precedent Transactions: The Process
Precedent transactions value a company based on what acquirers have actually paid for similar companies. These reflect control value, what someone paid to own the entire business.
Step 1: Identify Relevant Transactions
Search for M&A deals involving companies similar to the target. Key criteria:
- Same industry/sector
- Similar size
- Recent (typically within 2-5 years)
- Similar deal rationale (strategic vs. financial buyer)
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Step 2: Calculate Transaction Multiples
For each deal:
- Transaction Value (enterprise value paid by acquirer)
- Target's LTM financials at the time of the deal
Common transaction multiples: EV/Revenue, EV/EBITDA, EV/EBIT (same as trading comps, but based on prices paid, not current trading prices).
Step 3: Apply to Target
Same application as trading comps, use the median/mean multiple and apply to the target's metrics.
The Control Premium: Why Precedent Transactions Are Higher
This is the interview question that always comes up:
"Why are precedent transaction multiples typically higher than trading comps?"
The control premium. When an acquirer buys a company, they pay a premium above the current market price because:
- Synergies, The acquirer expects to realize cost savings or revenue synergies
- Control, Owning 100% lets you make strategic decisions (restructure, divest units, change management)
- Competitive bidding, Multiple bidders can drive up the price
The control premium typically ranges from 20-40% above the unaffected trading price.
Trading Comps vs. Precedent Transactions vs. DCF
| Feature | Trading Comps | Precedent Transactions | DCF |
|---|---|---|---|
| Based on | Market pricing | Actual deal prices | Intrinsic cash flows |
| Reflects | Minority value | Control value | Intrinsic value |
| Sensitivity | Market conditions | Deal conditions | Assumptions |
| Best for | Relative comparison | M&A pricing | Absolute value |
| Weakness | Peer selection bias | Stale data | Assumption sensitivity |
Recommended Resource
Finance Technical Interview Guide
79 pages. Every question tagged by frequency with answer formats, red flags, and practice structure.
"Which valuation method gives the highest value?"
General rule of thumb (not always true):
- Precedent transactions, Highest (includes control premium)
- DCF, Middle (depends heavily on assumptions)
- Trading comps, Lowest (reflects minority, no-control value)
But this varies. In a hot market, trading comps could exceed transaction multiples. A DCF with aggressive assumptions could exceed everything.
"If you had to choose one method, which would you pick?"
Strong answer: "I wouldn't rely on just one, each method captures different information. But if forced, I'd pick the DCF because it's based on the company's fundamental cash-generating ability rather than the market's mood or the specifics of past deals. However, I'd always cross-check with comps to make sure my DCF isn't producing unreasonable multiples."
The Valuation Football Field
In practice, you present all three methodologies side by side in a "football field" chart, horizontal bars showing the valuation range from each method. This gives the client (or your interviewer) a visual picture of where value likely falls.
The overlap zone where multiple methodologies agree is typically the most defensible valuation range.
Common Interview Questions
"Walk me through how you'd run a comps analysis for [Company X]."
Use the 4-step framework above. Emphasize peer selection criteria and why you'd choose specific comps. Mention that you'd use forward multiples and present a range.
"What's the biggest limitation of comps analysis?"
No two companies are truly comparable. Every company has unique characteristics, growth trajectory, margin profile, management quality, market position, that make perfect comparisons impossible. The analyst's judgment in selecting comps introduces subjectivity.
"When would you weight precedent transactions more heavily?"
When the engagement is specifically about an M&A transaction and you need to understand what buyers have historically been willing to pay. The control premium embedded in these multiples is directly relevant.
Related Reading
- Enterprise Value vs. Equity Value Explained, Why EV-based multiples matter
- Walk Me Through a DCF: The Perfect Answer, The intrinsic valuation method
- Accretion/Dilution Analysis Explained, What happens after the deal
This covers the key concepts from Chapter 4 of our Finance Technical Interview Guide. The full chapter includes worked examples with real numbers, a step-by-step comps output table, and the "football field" construction framework.
Need quick-reference answers? Grab our free 20 Must-Know Technical Questions cheat sheet.