Module II· Trading ComparablesIntermediate

Question

How do you adjust comps when the target is significantly larger or smaller than the comp group?

Answer

Size adjustments:

If the target is smaller: a lower multiple because of the size discount (liquidity, economies of scale).

Rule of thumb

−0.5x to −1.5x EV/EBITDA for a 50% smaller market cap.

If the target is larger: a slightly higher multiple. But: adjusting heavily is confirmation bias. The better method: choose the comp set so the target sits within 0.5x−2x of the size. If that's impossible (e.g. a unique middle-market size): mid-cap comps + small-cap comps in two tranches, then a middle path.

Deep diveShow more details

Pitch tip

'Target EV $500m, comp-set median EV $1.2bn — we adjust −0.7x EV/EBITDA for the size differential, based on the Duff & Phelps size premium.'

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