Comparable Sales Method: Finding the Right Comps

The Power of Real Transaction Data

The comparable sales method values a business by reference to actual prices paid for similar businesses. It is grounded in the market principle of substitution: a rational buyer would not pay more for a business than the cost of acquiring a comparable alternative. When good comparable data exists, this method produces some of the most defensible valuations because it reflects what buyers actually pay in the real world.

Finding Comparable Transactions

The first challenge is sourcing reliable data. Primary databases for private company transactions include:

• DealStats (formerly Pratt's Stats): Over 40,000 private company transactions with detailed financial data
• BizBuySell: Aggregates transaction data from business brokers, focused on smaller businesses
• PitchBook: Comprehensive data on middle-market and PE-backed transactions
• GF Data: Focused on mergers and acquisitions transactions between $10-250M
• Industry-specific sources: Many industries have specialized transaction databases

Search for transactions within the same NAICS code or SIC code, then filter by size, geography, and recency. Ideally, comparable transactions should be within the past 2-3 years to reflect current market conditions.

What Makes a Good Comp

Not all transactions in the same industry are truly comparable. Evaluate potential comps on:

• Revenue size: Within 50-200% of the subject company
• Profitability: Similar margin profiles
• Growth trajectory: Growing, stable, or declining
• Geographic market: Local, regional, or national
• Business model: Same revenue model and customer type
• Deal timing: Recent enough to reflect current market conditions

Three to five strong comparables are generally sufficient. A single comp is not enough, and more than ten may introduce noise that dilutes the analysis.

Making Adjustments

Raw comparable data almost always requires adjustments to account for differences between the comp and the subject company. Common adjustments include:

• Size adjustment: Larger businesses command higher multiples due to reduced risk
• Growth adjustment: Faster-growing businesses deserve premium multiples
• Margin adjustment: Higher margins suggest better competitive position
• Customer concentration: Concentrated revenue reduces multiples
• Geographic premium/discount: Certain markets command premiums

Document each adjustment with clear reasoning. The goal is not to torture the data into supporting a predetermined conclusion but to make honest adjustments that improve comparability.

Presenting the Analysis

Present your comparable analysis in a structured format showing each transaction, the relevant metrics, the adjustments applied, and the adjusted multiples. Calculate the median and mean of the adjusted multiples and apply them to the subject company's financials. Discuss why the subject might fall above or below the median. This transparency builds credibility with all parties in a transaction.