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πŸ’° Financial Models
Relative Valuation (Trading Comps & Precedent Transactions)
Relative valuation answers: **"What would the market pay for a business like this one?"** Instead of building a bottom-up cash flow model (DCF), you look at what similar companies trade for and apply those multiples to your target.
2
Minutes
6
Concepts
+15+30
Read+Quiz
1
Comparable Company Analysis (Trading Comps)
Step-by-Step Process

1. Select the peer group (5-15 companies)

This is the most subjective and important step. Bad comps = bad valuation.

Criteria for selecting peers:

  • Industry: Same sector, same sub-sector if possible (e.g., "cloud infrastructure" not just "tech")
  • Size: Similar revenue or market cap range (within 0.5x-2x of target)
  • Growth profile: Similar revenue growth rates (a 40% grower shouldn't be comped to a 5% grower)
  • Margin profile: Similar EBITDA or operating margins
  • Geography: Same primary markets (US SaaS vs. European SaaS can trade very differently)
  • Business model: Recurring revenue vs. project-based, B2B vs. B2C, asset-light vs. asset-heavy

Common mistake: Including a "marquee" comp that's not actually comparable. Putting Salesforce in your peer set for a $50M ARR vertical SaaS company distorts everything.

2. Gather financial data

For each peer, collect:

  • Enterprise Value (EV) = Market Cap + Debt - Cash
  • Revenue (LTM and NTM estimates)
  • EBITDA (LTM and NTM)
  • Net Income / EPS
  • Key operating metrics (subscribers, GMV, etc.)

3. Calculate multiples

EV/Revenue  = Enterprise Value / Revenue
EV/EBITDA   = Enterprise Value / EBITDA
P/E         = Share Price / Earnings Per Share
EV/EBIT     = Enterprise Value / EBIT (operating income)
P/FCF       = Share Price / Free Cash Flow Per Share

4. Analyze the range

  • Calculate mean, median, 25th/75th percentile
  • Identify outliers and understand why they're outliers
  • Median is generally more reliable than mean (less skewed by outliers)

5. Apply to target

Implied EV = Target's EBITDA Γ— Median Peer EV/EBITDA
Implied Equity Value = Implied EV - Net Debt
Implied Share Price = Implied Equity Value / Shares Outstanding
Worked Example: Fintech Comps
Company          EV ($B)   Revenue   EBITDA   EV/Rev   EV/EBITDA   Growth
─────────────────────────────────────────────────────────────────────────
PaymentCo A       12.0      2.4B     600M      5.0x     20.0x       12%
PaymentCo B        8.5      1.8B     450M      4.7x     18.9x       15%
PaymentCo C       15.0      4.0B     900M      3.8x     16.7x        8%
PaymentCo D        6.0      1.2B     280M      5.0x     21.4x       18%
PaymentCo E       10.0      2.5B     550M      4.0x     18.2x       10%
─────────────────────────────────────────────────────────────────────────
Median                                          4.7x     18.9x
Mean                                            4.5x     19.0x

Target: $500M EBITDA, $2.0B revenue
Implied EV (median EV/EBITDA): $500M Γ— 18.9x = $9.45B
Implied EV (median EV/Revenue): $2.0B Γ— 4.7x = $9.4B