Trading Comps and Precedent Transactions: Building the Set, the Adjustments That Matter, and Defending Your Multiples
10 min read
- The three core methodologies sit in a predictable order on the football field: precedent transactions highest (they embed a control premium of roughly 20-35% over the unaffected price), trading comps in the middle (minority, market-clearing values), and DCF widest (assumption-driven).
- Building the comp set is the entire exercise. Five genuinely comparable peers beat fifteen loose ones, and the multiple you choose (EV/EBITDA, EV/Revenue, P/E, or a sector metric) must match the economics of the business.
- The adjustments separate real comps from garbage: calendarising to a common year-end, normalising EBITDA for non-recurring items, treating IFRS 16 leases consistently, and adding minority interest and associates into enterprise value.
- In an interview, you will not be asked to calculate a multiple. You will be asked to defend your comp set, explain why precedents sit above comps, and say which multiple you would use and why. That is where candidates are sorted.
Three Methodologies, One Hierarchy
Every valuation exercise triangulates the same three methods, and they land in a consistent order on the football field. Knowing that order, and why it holds, is the first thing an interviewer checks.
| Method | What It Measures | Typical Position on Football Field | Why |
|---|---|---|---|
| Precedent Transactions | What acquirers actually paid to take control | Highest | Embeds a control premium and, often, synergies the buyer expected to capture |
| Trading Comps | What the public market pays for a minority share, today | Middle | No control premium; reflects current sentiment, which can run hot or cold |
| DCF | Intrinsic value of projected cash flows | Widest range | Driven by assumptions; a 1% move in WACC can swing the output 15-20% |
The order is not a rule of nature, but it holds most of the time. A precedent set assembled at the top of a frothy M&A cycle (think 2007 or 2021) will sit above today's trading comps because deals were struck at multiples the market no longer supports. That staleness is a feature to understand, not a bug to ignore. The reason comps get used more than any other method is simple: they are fast and grounded in real prices. The reason they get tested harder than any other method is that the arithmetic is trivial and the judgement is not.
Building the Comp Set Is the Whole Game
A comp is not a company in the same SIC code. It is a company whose value is driven by the same things: growth profile, margin structure, end markets, capital intensity, and risk. A high-growth vertical software business at 40% revenue growth is not comparable to a mature on-premise software company at 4% growth, even though both are "software." Including the wrong peers does not dilute the answer; it changes it.
Practical screen: start with direct competitors named in the target's own filings, add companies the equity research analysts bracket together, and then cut ruthlessly for comparability. Fewer than five genuine peers and your median is statistically meaningless, because one outlier moves it 15-20%. More than ten and you have probably stopped being selective.
The Multiples That Actually Get Used
One multiple does not fit every business. The choice signals whether you understand the economics or are reaching for the default.
| Multiple | When to Use It | Why / Watch-Out |
|---|---|---|
| EV/EBITDA | Most mature, profitable companies; the Street default | Capital-structure neutral and pre-D&A, so it compares companies with different leverage and depreciation policies. Breaks down when capex intensity differs wildly between peers (EBITDA flatters the capital-heavy one). |
| EV/EBIT | Capital-intensive sectors where depreciation is a real economic cost | Captures the differing capex burden that EV/EBITDA hides. Useful for industrials and manufacturing. |
| EV/Revenue | Pre-profit or high-growth companies (early SaaS, biotech) | The only option when EBITDA is negative, but says nothing about whether the revenue is profitable. Always pair with a growth or margin reference point. |
| P/E | Comparing equity value where capital structures are similar | Distorted by leverage and one-off tax items. Standard in equity research, less so in M&A. |
| Sector-specific | EV/EBITDAR (leases), EV/Subscriber, EV/Production, P/Book (FIG) | Used when the standard metrics miss the value driver. P/Book and P/E dominate for banks because EV is not meaningful when debt is raw material, not financing. |
EV/EBITDA dominates for a reason: it strips out the two things that vary most across otherwise-similar companies, capital structure and depreciation policy. But the default is not always right, and reaching for it on a pre-profit company or a bank is a tell.
Calendarisation and the LTM Trap
Two companies in the same set rarely share a year-end. One reports to December, another to March. Comparing one company's LTM EBITDA to another's on a different period is comparing different economic windows, which is why the desk calendarises every name to a common reference period before computing a single multiple.
The other distinction that trips candidates is LTM versus NTM. LTM (last twelve months) is historical and certain; NTM (next twelve months) is forward and reflects expected growth, which is why a growing company trades at a lower NTM multiple than LTM multiple. State which basis you are quoting. A multiple without a period attached is meaningless, the same way a number without a reference point is.
The Adjustments That Separate Real Comps From Garbage
The multiple is a ratio of two numbers, and both need cleaning. Get the numerator (enterprise value) or denominator (the operating metric) wrong and the comparison is noise.
On the denominator, normalise EBITDA for genuinely non-recurring items: restructuring charges, litigation settlements, impairments, and one-off gains on disposals. The point of a comp is to capture the recurring earnings power, not the noise of a single year. Be disciplined, though, because "adjusted EBITDA" is where management teams hide recurring costs by relabelling them, and a comp set built on aggressive add-backs understates every multiple.
Two further consistency points decide whether a set holds together:
- IFRS 16 leases. Under IFRS 16, operating leases sit on the balance sheet as debt and lift EBITDA (rent moves below the line into D&A and interest). Mix an IFRS reporter with a US GAAP reporter using the old treatment and the multiples are not comparable. Either capitalise leases for everyone or strip them out for everyone, but do not mix.
- Diluted shares. Equity value uses fully diluted shares via the treasury stock method, counting in-the-money options and converts, not just basic shares outstanding. On a company with a heavy option pool this moves the equity value, and therefore the multiple, by several percent.
Precedent Transactions: Same Math, Plus a Control Premium and a Time Machine
Precedent transactions are trading comps run on deals instead of live market prices: the same multiples, computed on the price an acquirer paid. Two things make them sit higher and behave differently.
First, the control premium. An acquirer buying 100% of a company pays more per share than the market charges for a sliver of it, typically 20-35% above the unaffected share price (the price before the deal leaked or was announced). Quote the acquisition multiple and you are quoting a controlled price, which is why precedents anchor the top of the football field. Second, the time machine problem. A deal struck in 2021 reflects 2021's financing conditions and sentiment. Cheap debt and competitive auctions pushed multiples to levels that a 2026 buyer, facing higher rates, will not pay. Always check when the deal was done before leaning on the multiple.
Source them from merger proxies, deal press releases, and the acquirer's investor materials, computing the multiple on the target's LTM figures at announcement. And expect synergies to be baked in: a strategic buyer paying 12x where comps say 9x is often paying for cost or revenue synergies it expects to extract, which is why strategic precedents can sit above what any financial sponsor would pay.
Defending Your Multiples in an Interview
"Why do precedent transactions usually come in higher than trading comps?"
Two reasons. Precedents embed a control premium, because the buyer is acquiring the whole company, not a minority share, typically 20-35% over the unaffected price. And they often embed expected synergies, particularly for strategic buyers. Trading comps reflect the price of a minority stake in the public market, with no control and no synergies.
"How do you decide which companies go in the comp set?"
Comparability of the business, not the label. I screen for companies with a similar growth profile, margin structure, end markets, and capital intensity, starting from competitors named in the target's filings and the brackets equity research uses. I would rather have five genuine peers than ten loose ones, because below five the median is moved too easily by a single outlier.
"Which multiple would you use for a capital-intensive manufacturer?"
EV/EBIT rather than EV/EBITDA. EBITDA ignores depreciation, but for a capital-heavy business the capex behind that depreciation is a real, recurring economic cost. EV/EBIT captures the differing capital burden across peers that EV/EBITDA hides.
"Why do you take the median multiple rather than the mean?"
The median is robust to outliers. With a small peer set, one company trading at a distorted multiple, because of a takeover rumour or a depressed earnings year, drags the mean but barely moves the median. The median is a better estimate of the central tendency of a comparable group.
"What do you add to equity value to get enterprise value?"
Total debt, preferred equity, and minority interest, then subtract cash and investments in associates. Minority interest goes in because EBITDA consolidates the full subsidiary, so EV must capture the full set of claims against it. Get this wrong and the numerator is inconsistent with the EBITDA you are dividing into it.
Take Your Preparation Further
Download our free Valuation Cheat Sheet for the full enterprise value bridge, the multiple-selection framework, and the standard EBITDA adjustments. For model answers to every valuation question type, see the IB Interview Bible.
For the methodology that sits alongside comps on every football field, see DCF Terminal Value Explained. For why two analysts can value the same company 30% apart, see How to Think About Valuation.
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