Trading comps vs. transaction comps — when to use each.
Model answer
Both are relative valuation methodologies, but they answer different questions.
Trading comps — also called public comparables — value a target by looking at the multiples public companies in the same industry trade at on the open market. You pick a peer set of 5-15 public companies with similar business models, size, growth, and margins, calculate metrics like EV/EBITDA, EV/Revenue, P/E, then apply the median or mean to your target's metric. Use trading comps when you want to know what the public market would pay for this business in a non-control transaction — IPO valuations, secondary offerings, or as a sanity check on a DCF.
Transaction comps — also called precedent transactions — look at multiples paid in actual M&A transactions for similar companies. Same logic: identify deals in the last 3-5 years, look at the price paid divided by the target's EBITDA at announcement, apply the median to your target. Use transaction comps when you're advising on an M&A deal and you want to know what an acquirer has actually paid for similar assets.
The key analytical difference is the control premium. Transaction comps include a control premium — typically 20-40% over the unaffected trading price — because acquirers pay a premium to take 100% control and access synergies. Trading comps reflect minority-stake valuations. So transaction comp multiples are systematically higher than trading multiples for the same companies.
When to weight which: in a sale-side process, transaction comps are the most relevant benchmark because they reflect what a buyer might actually pay. In a fairness opinion or going-private deal, both matter — transaction comps for the takeout, trading comps for the alternative of staying public. In an IPO, you only use trading comps because there's no control transaction.
A caveat on transaction comps: they're often dated, the multiples reflect the market environment at the time of the deal, and disclosed financials can be incomplete. I always note the deal vintage and adjust for cycle.