Your DCF says $660,945. What are shops like yours actually selling for?
The story so far In Lesson 15.1, your DCF said your bike shops are worth about $660,945, and the chain offered $500,000. The chain's buyer pushes back: "A DCF is just your guesses." So you look up what similar bike businesses really sold for. Three nearby shops sold in the last two years, at 5, 6 and 7 times their yearly operating income. Your shops make $110,000 of that profit. This lesson turns those three sales into a price for yours.
Comparables, or comps, price a company by looking at what investors pay for similar companies, using ratios called multiples.
It's fast, it's based on real prices, and it's the first number most bankers, buyers and investors check. Stock prices on the news are often quoted as a multiple.
Find similar companies, divide each one's price by its profit to get a multiple, pick a typical multiple, and multiply by your company's profit.
Investment banking analysts build "comps tables" for every deal. Equity research analysts compare a stock's multiple with its rivals. Business brokers price small businesses this way.
What you're looking at: three bike shops that sold recently, each tagged with its multiple: how many times its yearly operating income the buyer paid. Your shops have a question mark. Use the middle multiple, 6, and your $110,000 profit: about $660,000, almost exactly what your DCF said.
A multiple is a price per dollar of profit.
A DCF builds the value from your own forecast. Comps start from the other end: what are real buyers paying right now for businesses like yours? Bankers almost always do both and compare.
Multiples
You can't compare prices directly; a bigger shop costs more. So you divide each price by a measure of how much the business earns. That ratio is a multiple: how many dollars a buyer pays for each dollar of profit.
- The first shop that sold
- Price $500,000, yearly profit $100,000: $500,000$100,000 = 5x, read "5 times."
The P/E ratio
The multiple you'll hear most for stocks is the P/E ratio: the share price divided by earnings per share (EPS), the company's net profit split across its shares.
- The bike maker from Lesson 14.3
- Its stock is $30 and it earned $2 per share: $30$2 = a P/E of 15. Investors pay $15 for each $1 of yearly profit.
- Going the other way
- If a rival earns $3 a share and similar stocks trade at a P/E of 15, its stock should be about 15 × $3 = $45.
EBITDA and EV/EBITDA
For buying a whole business, bankers use EBITDA (say "ee-bit-dah"): operating income (EBIT, Lesson 12.1) with depreciation added back. It's a rough measure of the cash the business itself makes, before lenders and taxes. They divide enterprise value (Lesson 15.1) by it to get EV/EBITDA.
- Your shops' EBITDA
- Operating profit $95,000 + depreciation on tools and the van $15,000 = $110,000.
Match the top and the bottom. EBITDA comes before interest, so it belongs to lenders and owners together; pair it with enterprise value, which is also for both. Earnings per share come after interest, so they belong only to owners; pair them with the share price.
Pick good comps, then the middle one
Comparable companies should be in the same industry, with similar size, growth and risk. Prices paid to buy whole similar companies are called precedent transactions. Then use the median, the middle number once sorted, so one strange sale can't pull the answer too far.
- Shop A
- Sold for $500,000; EBITDA $100,000: $500,000$100,000 = 5x.
- Shop B
- Sold for $480,000; EBITDA $80,000: $480,000$80,000 = 6x.
- Shop C
- Sold for $840,000; EBITDA $120,000: $840,000$120,000 = 7x.
- Left out
- An electric bike startup sold at 15x. It's growing fast and isn't like your shops, so it's not a comp.
- Median
- 5x, 6x, 7x: the middle is 6x.
Apply it
Multiply the multiple by your own number. Then, just like in Lesson 15.1, subtract debt and add cash to get the owners' share.
- Your shops
- 6 × $110,000 = $660,000. Your DCF said $660,945. Two methods, nearly the same answer.
- Owners' share
- $660,000 − $40,000 loan + $20,000 cash = $640,000.
- The chain's offer
- $500,000$110,000 = about 4.5x, below every shop that sold.
Why multiples differ
A higher multiple means investors pay more today for each dollar of profit. They do that when they expect that profit to grow faster, or when it's less risky. That's why a fast-growing software company can trade at a P/E of 40 while a steady utility trades at 15.
The weak spot: comps tell you what others are paying, not what a business is truly worth. If the whole market is overpriced, the comps are too. In the 1999 to 2000 dot-com bubble, many internet stocks looked "cheap" next to other internet stocks, and then most of them crashed.
Put it on a football field
Bankers show every method's range on one chart called a football field, because the bars look like a field's yard lines. Where the bars overlap is the fair price. Slide the multiple to move your comps value.
What you're looking at: a football field for your shops. The blue bar is your DCF from 12% down to 8% (Lesson 15.1). The green bar is the comps from 5x to 7x your $110,000 EBITDA. The dot is the multiple you picked. The dashed line is the chain's $500,000 offer.
Two minutes. Just listen.
Tap any line to jump to it.
Comps table.
Eight questions an analyst answers while building a comps table. Each one gives you the numbers. One try each.
What you're looking at: made-up companies. Each lists the numbers, then asks one question.
The logic, step by step.
Every comps valuation follows four steps.
Step 1: Pick comparable companies
- Kept
- Three local bike shops. Left out: the fast-growing electric bike startup.
Step 2: Find each one's multiple
- The three shops
- 5x, 6x and 7x.
Step 3: Pick the median
- Median
- 6x.
Step 4: Apply it to your company
- Your shops
- 6 × $110,000 = $660,000; owners' share $640,000.
Worked example: answering the chain
The chain's buyer says, "Your DCF is just guesses." Here are the facts:
- Your DCF: $660,945 at 10%, from about $523,441 at 12% to $890,765 at 8%.
- Comps: 5x to 7x your $110,000 EBITDA, so $550,000 to $770,000.
- The offer: $500,000.
- Find the overlap. The DCF range ($523,441 to $890,765) and the comps range ($550,000 to $770,000) overlap from $550,000 to $770,000.
- Check the offer. $500,000 is below both ranges. It's about 4.5x EBITDA, lower than any shop that sold.
- Pick your ask. Both middles land near $660,000: 6 × $110,000 = $660,000, and the DCF at 10% gives $660,945.
- Expect pushback. The buyer may argue your shops deserve a lower multiple, maybe because they're smaller than Shop C. Be ready with your growth and how steady your profit is.
- The answer. Counter at about $660,000 and show the football field. Two methods agreeing makes your number much harder to argue with.
Weighing a dinosaur with living animals.
Nobody can put a dinosaur on a scale. So in 2012, scientists measured how thick the leg bones are on hundreds of living animals, from mice to elephants, and how much each animal weighs. Thicker bones go with heavier bodies in a steady pattern. Then they measured dinosaur bones and read the weight off that same pattern.
What you're looking at: an illustration, not data. Living animals (blue) show how body weight rises with leg bone thickness. The dinosaur (orange star) is weighed by placing its bones on the same pattern.
Why this sticks. The living animals are the comps; bone thickness is the profit; body weight is the price. Measure the thing you can see, then borrow the pattern from similar things you can weigh.
The page you'd copy down.
- Multiple = priceprofit: dollars paid per dollar of profit.
- P/E = share priceearnings per share: $30$2 = 15.
- EBITDA = operating income + depreciation: $95,000 + $15,000 = $110,000.
- EV/EBITDA for whole companies. Match: EV with EBITDA (before interest), price with EPS (after interest).
- Comps: same industry, size, growth, risk. Use the median: 5x, 6x, 7x → 6x.
- Apply: 6 × $110,000 = $660,000; − debt + cash = $640,000.
- Faster growth or less risk → higher multiple. Comps show what others pay, not true worth.
- Football field: show each method's range; the overlap is the fair price.
Fill in the blanks
Grab a friend or a study group.
P/E hunt
Each person looks up the P/E of two companies in the same industry, like two airlines or two soda makers. Why is one higher?
Comp or not?
One person names a company. The others call out good and bad comps for it and explain why in one sentence each.
Price a used car
Look up three listings of the same model and year. Divide each price by its miles left or its age. That's a comps table for cars.
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're an investment banking analyst
A client wants to sell their chain of gyms. Your managing director wants a comps value by tomorrow. Here's the situation:
- The gyms' EBITDA: $8 million.
- Five recent gym sales, EV/EBITDA: 7x, 8x, 9x, 10x and 14x. The 14x was a fast-growing luxury chain.
- Debt: $12 million. Cash: $2 million.
- The owner hopes for: $100 million for the whole business.
Your task: find the median multiple and the enterprise value. What range would you show? What's the owners' share? What multiple would $100 million take, and what would you tell the owner?
See a model answer
Median: sorted, 7x, 8x, 9x, 10x, 14x; the middle is 9x. Enterprise value: 9 × $8 million = $72 million.
Range: the luxury chain isn't a good comp, so use 8x to 10x: $64 million to $80 million.
Owners' share: $72 million − $12 million + $2 million = $62 million.
The owner's hope: $100 million$8 million = 12.5x, above every typical sale. Only a fast-growing chain got more. Unless the client can show growth like that, we should set expectations around $64 to $80 million.
Two methods, one fair price.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and the lesson that comes next.
- Back · Unit 12The income statement
- Back · Unit 14Risk and return
- Back · Unit 15Valuing a company with DCF
- You are hereComparables and multiples
- Next · Unit 15Mergers and buyouts