Nobody serious asks a candidate to define comparable companies analysis; the definition is a search away. What I asked instead and what every colleague asked, was judgement questions: how would you build the set, why is that company in it, why are your precedent multiples higher than your trading comps. Comps are the analysis where the inputs are the argument and interviews test the argument.
Building the set: the filters in order
The screening filters · in priority order
1 · Business model first: what the company actually sells, to whom, on what economics. This filter outranks every other.
2 · Then size, because scale changes margins, risk and multiple.
3 · Then geography, because growth, rates and accounting differ by market.
4 · Then growth and margin profile, so you are comparing like trajectories.
5 · Aim for 5-10 names. Below five the set is anecdote; far above ten it is noise.
Where the names come from is a fair follow-up with a practical answer: the competition section of the company's own filings, the peer sets in research initiations and the company's investor materials, since management helpfully names its own comparables. Then the honest part: every set contains a judgement call, the slightly-too-big peer or the one with a side business and the strong candidate volunteers the weak link before being asked. A comp set is a defended argument, not a database output.
Spreading them cleanly
Three hygiene points separate a real answer from a recited one. Calendarise, so companies with different fiscal year-ends sit on comparable periods. Choose the basis deliberately, trailing versus forward and be able to say why forward multiples usually carry more information when estimates are reliable. And clean the one-offs, restructuring charges, disposals, litigation, because a multiple built on polluted earnings inherits the pollution, the same fragility the multiples article on this site catalogues. In modelling tests this spreading work is exactly what gets examined under time pressure, per the modelling tests article.
Precedents: why the multiples run higher
The classic question and the full answer has three layers. Control: an acquirer buys the right to run the company, redirect its cash and replace its management and that right costs a premium over a minority share price. Synergies: a strategic buyer can pay for value that only exists in combination and competitive auctions force some of that value into the price. And cycle: precedents are stamped with the market conditions of their announcement date, so a set of deals from a hot cycle carries that heat into your range. Which produces the counter-question strong candidates anticipate: when would precedents be lower than trading comps? Distressed sellers, forced disposals and deals struck at the bottom of a cycle, because the premium logic runs in reverse when the seller has no leverage.
Defending the output
The last mile is presentation and challenge. Ranges beat point estimates, the football-field summary exists precisely because each methodology answers a slightly different question and the interviewer's favourite closer is 'your precedents say one range, your DCF another, which do you believe?' The scoring answer explains what each method is sensitive to, the DCF to its terminal assumptions as the anchor article shows, comps to the market's current mood, precedents to deal-specific circumstances and then commits to a view with reasons. Every precedent in your set is also a deal you should be able to discuss for two minutes, which is where this analysis feeds the framework in the talking-about-a-deal article.
Build one real set for a company you follow, spread it and defend it aloud against the questions above. That single exercise converts this topic from theory to material and having it cross-examined properly is one session of the IBD Recruiting Review.
FAQ
How do I build a comparable companies set?
Business model first, then size, geography, growth and margins, aiming for 5-10 names sourced from filings, research initiations and the company's own investor materials.
Why are precedent transaction multiples higher than trading comps?
Control premiums, synergies competitive processes force into price and the market conditions stamped on each deal's announcement date.
When would precedent multiples be lower than trading comps?
Distressed sellers, forced disposals and deals struck at cycle bottoms, where the premium logic runs in reverse because the seller has no leverage.
Former Executive Director in TMT Investment Banking at Nomura and M&A banker at BNP Paribas. Top-rated mentor with 300+ sessions. About
