What Does
Comparable Mean?
A comparable, or “comp,” is a reference to a comparable public company or comparable transaction used in the market valuation for a similar company. The implied valuation multiples obtained from the market capitalization of public companies or the enterprise value of a disclosed transaction are applied to the metric of a similar subject company to determine its value.
Some of the most common comparables include the multiple of EBITDA, EBIT and free cash flow (FCF). Usually, the valuation of the subject company will not be driven simply by applying this comparable multiple, but rather as a reasonability check once a comprehensive valuation has been completed.
Divestopedia Explains Comparable
Although information is readily available for a number of comparable public companies and transactions, it is rare to find a true comparable for industry, size and geography. For example, a billion dollar public company will not be a true comparable for a $50 million dollar private company, even if both companies operate in the same industry and region. A valuation discount to the implied comparable multiple will usually be applied due to the size premium that a billion dollar company would command.
Valuators will use a tremendous amount of judgment and experience when applying an appropriate market valuation multiple. Also, limited information on private company transactions make it difficult to find true comps for mid-market businesses.