Comparable companies

Businesses similar enough to the one being valued that the prices paid for them are evidence about its price. Similarity means growth, margin, capital intensity and customer concentration - not industry label.

Example

Four print and publishing businesses that changed hands at 7.0, 9.5, 11.0 and 14.5 times EBITDA.

Important

Write the inclusion criteria before you look at any multiple. A peer excluded for a reason you would not have noticed had its number been different was excluded for its number.

Related terms

• Valuation multiple — A price divided by something the business produces - earnings, cash flow, revenue, subscribers. A compressed way of expressing what buyers paid.
• EV/EBITDA — Enterprise value divided by EBITDA - the most common multiple for comparing whole businesses, because both parts are calculated before the effects of borrowing.
• Price-to-earnings ratio — The price of a share divided by the earnings attributable to it. An equity multiple, because both parts are measured after interest has been paid.

Lessons that explain it

• The entry multiple is set by auctions, and the fund's value by its own appraisals — Buyouts are priced as a multiple of earnings in competitive sales, and between purchase and exit the fund's value rests on appraisals that move far more smoothly than markets. (11 min)
• The multiple is a discount for size, concentration and dependence on one person — There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business. (11 min)
• The scorecard method starts from what similar deals were priced at — The scorecard method takes the typical pre-money valuation of comparable early-stage deals in a region and adjusts it up or down by comparing the company on weighted factors. (10 min)
• A revenue multiple for a young company needs three adjustments — Once a startup has revenue, it is often valued as a multiple of it. Borrowing public or late-stage multiples requires adjusting for growth, size and illiquidity before the number means anything. (11 min)
• The price is whatever the last round negotiated, and preferred is not common — Between financings there is no price at all, only the last round's number carried forward. And the price paid for preferred stock buys something a common shareholder does not have - which is why two shares issued in the same round at the same price are not worth the same thing in every outcome. (11 min)
• Comparables and multiples: what the market is already paying — A multiple is not a shortcut past valuation. It is somebody else's valuation, compressed into one number, and using it means inheriting every assumption inside it. (12 min)

All 578 terms in the Investing glossary