relative valuation
Relative valuation estimates what a company is worth based on how similar businesses are priced in the market using comparable multiples.
Relative valuation estimates a company’s worth by comparing it to similar businesses. Instead of focusing on fundamentals alone, it looks outward—using standard market multiples like EV/EBITDA, price-to-earnings, or revenue multiples to benchmark value against peers. It’s fast, widely used, and anchored in market behavior.
This approach is common in M&A, fundraising, and equity analysis. It doesn’t tell you what something should be worth. It tells you what similar companies are worth—and where your company fits on that spectrum.
What this looks like in real analysis
A startup raising a Series B looks at five recent deals in their sector. Each closed at 8–10x ARR. The team adjusts for size, growth rate, and margin profile. Based on those comps, they aim to raise at a 9x multiple. The number doesn’t come from intuition—it’s derived from the market.
In another case, a corporate development team benchmarks a business unit against public peers. They compare EBITDA margins, growth rates, and valuation multiples. The exercise surfaces both upside and risk—and informs how they structure the narrative in a divestiture process.
What people often get wrong about relative valuation
Some think relative valuation is objective. It’s not—it’s contextual. The quality of the result depends on the quality of the comps. Bad data leads to bad decisions. Another trap: assuming market consensus equals accuracy. Multiples can reflect hype as much as fundamentals.
Also: this method alone doesn’t capture unique strengths or risks. A company might deserve a premium—or a discount—based on its model, execution history, or growth strategy. Without nuance, comparisons oversimplify.
Comparison helps, but judgment matters more
Relative valuation is a useful tool, not a final answer. It gives you directional context and a sense of how the market prices certain traits. But great decisions come from combining market insight with deep internal understanding. Benchmarks set the stage—judgment moves the needle.
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