While Discounted Cash Flow (DCF) provides an intrinsic valuation based on projected performance, it relies heavily on assumptions about the future. That's why financial analysts often use relative valuation methods as a sanity check or even as a primary method when data or certainty is limited.

Comparable Company Analysis (Comps)

This method is rooted in a simple question: What are similar companies worth right now?

By examining companies in the same industry with similar size, growth, and risk, you can estimate the value of your own business.

The challenge? Ensuring you're truly comparing apples to apples. Adjustments often need to be made for accounting differences, one-off events, or capital structure variations.

Precedent Transaction Analysis

Here, the valuation is based on what others have paid in actual acquisition deals. It's grounded in real-world behavior, which gives it strong credibility—especially for M&A decisions.

But precedent deals can be inflated by acquisition premiums, synergies, or market sentiment at the time. And unlike public comps, deal data can be harder to come by.

When are These Methods Useful?

• Early-stage companies with uncertain cash flows may not be suitable for DCF. Comparables offer a market-based proxy;
• Quick estimates or market sentiment checks often rely on comps;
• Negotiations in M&A frequently cite precedents and multiples.