A peer group is a set of companies or assets which are selected as being sufficiently comparable to the company or assets being valued (usually by virtue of being in the same industry or by having similar characteristics in terms of earnings growth and/or return on investment).
In practice, no two businesses are alike, and analysts will often make adjustment to the observed multiples in order to attempt to harmonize the data into more comparable format. These adjustments may be based on a number of factors, including:
- Industrial / business environment factors: Business model, industry, geography, seasonality, inflation
- Accounting factors: Accounting policies, financial year end
- Financial: Capital structure
- Empirical factors: Size
- These adjustments can involve the use of regression analysis against different potential value drivers and are used to test correlations between the different value drivers.
When the peer group consists of public quoted companies, this type of valuation is also often described as comparable company analysis (or "comps", "peer group analysis", "equity comps", " trading comps", or "public market multiples"). When the peer group consists of companies or assets that have been acquired in mergers or acquisitions, this type of valuation is described as precedent transaction analysis (or "transaction comps", "deal comps", or "private market multiples").