Valuation: Comps and Precedents

Choosing the right multiple

Always pair EV with pre-interest metrics and equity value with post-interest metrics.

Why would a company trade at a premium to peers?

Faster growth, higher margins or returns on capital, more recurring revenue, a stronger competitive position, or scarcity value. If growth and profitability are similar, look for differences in risk (customer concentration, leverage), liquidity and market sentiment.

Interview answer template

"I'd pick 5–10 peers on industry, size and growth, compute EV / EBITDA and P / E on LTM and forward numbers, and take a range around the median. For precedents I'd use deals from the last few years in the sector; those multiples are usually higher because of the control premium. I'd apply both ranges to the target's EBITDA, subtract net debt, and divide by diluted shares."

Worked example

Implied share price ranges: 52-week range 38–52, trading comps 40–55, precedents 48–63, DCF 45–70, LBO at a 20–25% IRR 36–50. The current price is 42.

Most methods overlap between roughly 48 and 55, so an offer in that zone is defensible: it is a premium of about 14–31% to the current price and inside the precedent range. An offer of 45 would look light because it sits below the precedent range.

Why the LBO is often the floor

A financial sponsor can pay only what still earns its target return using leverage and no strategic synergies. A strategic buyer with synergies can usually outbid that price, so the LBO range marks a level a seller should not go below.

Ranking the methodologies

A common interview question is "rank the methods from highest to lowest". A good answer avoids a rigid rule: precedents are usually highest because of the control premium; the DCF is the most variable because it depends on assumptions; trading comps are typically below precedents. Market conditions can flip this — in a sell-off, precedents from a hotter market look expensive and trading comps look cheap.

How to build a sensible range

• Use the interquartile range of multiples, not the minimum and maximum.
• For the DCF, sensitise WACC (±0.5–1%) and terminal growth (±0.5%) or the exit multiple (±1.0x).
• Keep the same metric definition (LTM vs forward, adjusted vs reported) across rows.
• Show the offer price and current price as vertical lines so the reader can see premiums instantly.

Interview framing

"I wouldn't average the methods. I'd look at where the ranges overlap and weight the most reliable ones for this company — for a stable, cash-generative business I'd lean on the DCF and precedents; for a volatile one, trading comps and the LBO floor."