Direct vs Indirect Peers

When you build a peer set, you must decide: do I include only direct competitors (companies that fight for the same customers and revenue), or do I also include indirect peers (companies in adjacent markets with similar business models)? The answer is: it depends on your situation, but you need to be intentional about it.

Direct peers are companies that compete head-to-head with your target. They sell similar products to similar customers at similar prices. Indirect peers operate in adjacent segments or verticals but share the same underlying business model, cost structure, or profitability profile. Both are useful; both have strengths and weaknesses.

The distinction is critical because it affects the multiples you extract, the credibility of your valuation, and your ability to defend it to skeptics. Mixing direct and indirect peers without acknowledging the difference is a fast way to produce a sloppy, defenseless valuation.

Quick definition

Direct peers are companies that compete with your target for the same customers, in the same market, with similar products. Indirect peers are companies in adjacent markets or verticals that share similar business models, profitability structures, or growth profiles, but do not directly compete. Direct peers are more comparable but often scarce; indirect peers are more plentiful but require more adjustment.

Key takeaways

• Direct competitors are the "purest" peers because they compete in identical markets; use them when available
• Indirect peers (adjacent markets, similar models) add useful benchmarks but require explicit adjustment or notation
• Some industries have few direct public competitors (biotech, specialty retail, industrial niches); in these, indirect peers are necessary
• Mixing direct and indirect without distinction erodes credibility; always disclose which is which
• Direct peer multiples anchor your "true" valuation; indirect peer multiples are a cross-check or adjustment
• Growth, margin, and leverage differences between direct and indirect peers often drive valuation gaps
• The strength of the indirect peer set increases with business model similarity, even if market is different

Direct peers: definition and benefits

Direct peers are companies that are direct competitors. They sell the same (or very similar) products to the same customers in the same geographic markets. Examples:

• Coca-Cola and PepsiCo: Both are global beverage companies selling soft drinks, juices, water, and sports drinks to the same retail and food-service customers.
• Ford and General Motors: Both are global automakers selling sedans, trucks, and SUVs to similar customer bases.
• Zoom and Microsoft Teams: Both are video conferencing platforms selling to enterprises and SMBs.
• Netflix and Disney Plus: Both are streaming video services competing for entertainment subscriptions.

Advantages of direct peers:

• Most directly comparable: they face the same market dynamics, customer demands, regulatory environment, and competitive pressures
• Similar cost structures: they make similar products with similar inputs and labor costs
• Identical growth drivers: revenue growth is driven by the same factors (market share, pricing, new product adoption)
• High credibility: no one questions why Coca-Cola is a peer for PepsiCo
• Least adjustment required: you can use direct peer multiples with minimal tweaking

Disadvantages:

• Often scarce: some industries have only two or three major public competitors
• May have significant differences despite competing in the same space: one might be a low-cost leader; another might be a premium player
• May have different geographies or customer mixes: one company is 80% North America; another is 40% Europe
• Concentrated peer sets have less diversity: a five-peer set of four direct competitors and one outlier is weaker than a broader indirect set

Indirect peers: definition and benefits

Indirect peers are companies in adjacent or parallel markets with similar business characteristics but different customer bases or geographies. Examples:

• Valuing a regional beverage maker: Direct peers might be non-existent (few public regional beverage companies). Indirect peers: Coca-Cola, PepsiCo (national/global, much larger, but same product category), energy drink makers (e.g., Monster), juice makers (different beverage category but similar margins and distribution).
• Valuing a mid-cap software CRM company: Direct peers might be few. Indirect peers: other enterprise SaaS companies (sales engagement, marketing automation, customer service platforms) that have similar business models (recurring revenue, high gross margins, scalable units) even though they serve different use cases.
• Valuing a specialty industrial equipment maker: Direct peers might be limited to one or two public companies. Indirect peers: other industrial equipment makers in related niches (same sales cycle, similar margins, similar capex intensity).

Advantages of indirect peers:

• Broader universe: more companies to choose from, allowing a more diverse peer set
• Better sample size: 8–10 indirect peers are easier to find than 8–10 direct peers
• Adds geographic/segment diversity: you can include regional variations and adjacent verticals
• Often more liquid and stable: large indirect peers (if you include them) tend to be larger and more established
• Reinforces key drivers: indirect peers show whether your target's profitability and growth are in line with adjacent markets

Disadvantages:

• Less directly comparable: indirect peers operate in different markets, face different customers, and may have different competitive dynamics
• Requires explicit adjustment: you need to explain why an indirect peer is relevant and potentially adjust its multiples
• Risk of diluting the peer set: too many indirect peers can obscure the real comparables
• Less credible in presentation: skeptics will ask "why include a beverage company in a juice maker valuation?"—you need a good answer

When to use direct peers, indirect peers, or both

Use only direct peers if:

• Your target operates in a competitive, fragmented market with multiple public competitors (e.g., large-cap tech, financial services, consumer retail)
• You have 8–10+ direct competitors to choose from (you can build a robust peer set without going elsewhere)
• Direct peers are comparable in scale, geography, and business model (not a huge dispersion)
• Your stakeholders (board, analysts, investment committee) are familiar with and confident in the direct peer set

Use primarily indirect peers (with few/no direct peers) if:

• Your target is in a niche industry with few public competitors (e.g., biotech, specialty manufacturing, vertical SaaS)
• Your target is the largest public company in its narrow category (e.g., a mid-market retailer with no comparable-sized public peers)
• Your target operates in a new or rapidly evolving category with limited peer options (e.g., a DTC (direct-to-consumer) software startup in a nascent space)
• You supplement indirect peers with transaction comps (recent M&A of similar companies)

Use both (direct and indirect) if:

• You have a small number of direct peers (3–5) and need to supplement with adjacent ones
• You want to show the range: direct peer valuation as the "core" anchor, indirect peers as a "sanity check"
• Your target straddles multiple categories or segments (e.g., a healthcare IT company that competes partly with EHR (electronic health record) vendors and partly with revenue-cycle management vendors)

Direct peer sets: examples and challenges

Example 1: Valuing a large-cap pharmaceutical company

Direct peers are abundant and clear: other large-cap pharma companies like Merck, Bristol Myers Squibb, Eli Lilly, AbbVie, J&J (pharma division), etc. You can build a robust peer set of 8–10 direct competitors. Challenge: some are more diversified than others (J&J has medical devices and consumer products); some have higher R&D spending (higher risk, longer time to ROI); some are emerging-market focused vs developed-world focused. Still, they are all direct competitors.

Example 2: Valuing a regional commercial bank

Direct peers: other regional banks of similar size and geography (e.g., if your target is a $50 billion regional bank in Texas, direct peers are other $40–60 billion regional banks like Truist, Keycorp, etc.). You can build a set of 6–8 direct competitors. Challenge: deposits, loan portfolios, and net interest margins vary by region (a Florida bank focused on real estate is different from a California bank focused on tech lending); leverage and profitability can vary significantly.

Example 3: Valuing a mid-market e-commerce aggregator (Shopify-adjacent)

Direct peers are scarce. True direct competitors (companies aggregating e-commerce sellers and taking a revenue share) are limited. You have Shopify (much larger), maybe one or two others. You need indirect peers: other SaaS or subscription software companies with high growth, high gross margins, and predictable recurring revenue. You note: "We use indirect peers (adjacent SaaS companies) because direct competitors in the aggregator space are limited; these indirect peers show the range of SaaS multiples for comparable-growth, comparable-profitability companies."

Indirect peer sets: how to build them responsibly

When you use indirect peers, you must be transparent about it and explain the connection. Here is how to do it:

Step 1: Identify the key dimension of similarity

Is it business model (recurring revenue, high margins)? Is it customer profile (SMB focus, long sales cycles)? Is it growth profile (high growth, unprofitable)? Is it profitability (20% EBITDA margins, high capex)? Be explicit.

Example: You are valuing a mid-market CRM software company. Direct competitors are scarce (mainly Salesforce, HubSpot, and maybe one or two others that are too large or too different). Key similarity dimension: all-in recurring SaaS revenue model with gross margins above 70% and high customer lifetime value. Indirect peers: other enterprise SaaS companies (marketing automation, customer service, sales engagement) with similar business model.

Step 2: Identify the differences

What is different between the indirect peer and your target? Geography? Market size? Product category? Profitability? Maturity?

Example: Indirect peer Zendesk operates in customer support software (not CRM), serves a broader customer base (SMB to enterprise), and is profitable. Your target is CRM-focused, has higher growth, and is not yet profitable. Difference: adjacent category, broader customer base, more mature.

Step 3: Adjust or segment

Do you need to adjust the indirect peer's multiple? Or do you segment your indirect peers into sub-groups?

Example: You can:

• Use Zendesk's multiple as-is, noting the differences
• Discount Zendesk's multiple by 10–15% because it is more mature (slower growth)
• Create a sub-segment: "Indirect peers of similar growth/profitability profile" (excluding the slowest growers)

Step 4: Disclose clearly

In your valuation report, disclose which are direct and which are indirect. A simple table helps:

Company	Peer Type	Market	Revenue	Growth	EBITDA Margin
HubSpot	Direct	CRM	$2.0B	25%	20%
Zendesk	Indirect	Customer Service	$1.4B	15%	15%
Monday.com	Indirect	Work Management	$400M	20%	12%

Then explain: "We include one direct competitor (HubSpot) and two indirect peers (Zendesk and Monday) because few direct competitors are publicly traded and comparable in scale. Indirect peers share the SaaS subscription model and operate in adjacent customer engagement verticals."

Real-world example: valuing a specialty industrial company

Company: SpecialMfg Inc., a $400 million revenue manufacturer of precision metal components for aerospace and automotive

Direct peer search:

You look for other publicly traded manufacturers of precision components in aerospace and automotive. You find:

• TransDigm (aerospace fasteners, etc.) — $10 billion revenue, too large
• Alcoa (aluminum manufacturing) — $15 billion, different product, too large
• Tri Arrows (specialty metals) — $800 million, closer fit, but different end markets

Only Tri Arrows is truly comparable. One direct peer is not enough.

Indirect peer expansion:

You decide to add indirect peers: other specialty manufacturers with similar:

• Capital intensity (significant fixed assets)
• End-market diversity (serve both aerospace and automotive)
• Profitability profile (12–18% EBITDA margin)
• Leverage (moderate debt)
• Growth rates (3–8% annually)

Indirect peers identified:

• HEICO (aerospace and defense components) — $8 billion, larger, better margins (25%+), but same sectors
• Esterline (aerospace systems) — similar profile, mixed direct/indirect
• Arcline (industrial components) — $600 million, good fit
• Esco Technologies (aerospace/defense) — $1.2 billion, slightly larger, good fit

Peer set construction:

Company	Peer Type	Market	Revenue	Growth	EBITDA Margin	Rationale
Tri Arrows	Direct	Specialty metals	$800M	4%	14%	Direct competitor in aerospace/auto
HEICO	Indirect	Aero components	$8.0B	8%	25%	Larger, higher margins, same sectors
Esterline	Indirect	Aero/defense	$3.5B	6%	18%	Adjacent, similar profile
Arcline	Indirect	Industrial components	$600M	3%	12%	Similar size, specialty focus
Esco Technologies	Indirect	Aero/defense	$1.2B	5%	15%	Similar profile, scale

Disclosure: "Our peer set includes one direct competitor (Tri Arrows) and four indirect peers in the aerospace and industrial components space. We use indirect peers because few direct public competitors exist in SpecialMfg's niche. Indirect peers share similar end markets (aerospace, automotive), capital intensity, and profitability profiles. Direct peer analysis focuses on Tri Arrows; indirect peers provide a range check on valuation multiples."

Valuation output:

• Tri Arrows (direct peer) EV/EBITDA multiple: 8.5x
• Indirect peers (4 companies) EV/EBITDA multiple range: 7.8x to 11.2x, median 9.2x
• Applied to SpecialMfg: $400M revenue × 15% EBITDA margin = $60M EBITDA. Using direct peer multiple: 8.5x × $60M = $510M EV. Using indirect peer median: 9.2x × $60M = $552M EV. Range: $510M–$552M, with direct peer as primary anchor.

Common mistakes with direct and indirect peers

Mistake 1: Mixing direct and indirect without disclosure

You list 8 peers, never revealing that 2 are direct and 6 are indirect. When questioned, you scramble to defend why an indirect peer is in the set. Be transparent from the start.

Mistake 2: Including indirect peers that are barely related

You are valuing a regional bakery and include packaged food companies (Mondelez, General Mills) as indirect peers because "they both have food products." This is too loose. A packaged food company has economies of scale and distribution leverage that a regional bakery does not. Better indirect peers: other regional food manufacturers with similar scale, capex, and profitability.

Mistake 3: Over-relying on indirect peers

You have one true direct peer and six indirect peers, and you give them equal weight in your valuation. This is backwards. The direct peer should be the primary anchor; indirect peers should be a secondary check. Weight accordingly.

Mistake 4: Assuming indirect peer multiples apply directly

A much larger indirect peer (e.g., $3 billion) may trade at a different multiple than your target ($400 million) due to scale, liquidity, and institutional ownership. Use a size-adjusted multiple or note the adjustment explicitly.

Mistake 5: Including competitors from different geographies without adjustment

A Japanese industrial company and a U.S. industrial company operate under different tax regimes, labor costs, and regulatory environments, and may have different profitability profiles. If you include both, adjust or segment accordingly.

A visual framework: direct vs indirect peers

FAQ

Q: Is a "direct peer" subjective?

A: Somewhat, yes. Two companies might be direct competitors in some markets and not in others. Coca-Cola and Pepsi compete in soft drinks (direct), but Coca-Cola also owns sports drinks and Pepsi owns snack foods (less direct). Be clear about which market segments define the competitive set.

Q: Should I include private competitors if they are well-known?

A: No, because you cannot easily get their financial multiples. Stick to public competitors. Note: "We are aware of major private competitors (e.g., Private Startup X), but include only public peers because their multiples are observable."

Q: Can I use a much larger competitor (like Salesforce for a mid-cap CRM company)?

A: Yes, but with caution. Salesforce is a direct competitor but vastly larger ($35 billion revenue). You can include it as a "reference peer" to show the multiples a large-cap CRM player commands, but your primary peers should be closer in scale. Disclose: "We include Salesforce as a large-cap reference peer; our primary peer set focuses on mid-cap CRM competitors."

Q: What if a competitor is highly specialized (one product, one market) and mine is diversified?

A: They are still a direct competitor, but note the difference. If your target is diversified and the peer is specialized, the peer might trade at a different multiple due to concentration risk or focus premium. This is a difference worth disclosing and potentially adjusting for.

Q: How many indirect peers can I use before it gets too loose?

A: If indirect peers are 50% or more of your set, your peer set is getting loose. Try to keep direct peers at 50%+ if possible. If you must use mostly indirect peers, supplement with transaction comps to anchor the valuation.

Q: Should I discount indirect peer multiples?

A: Not automatically. An indirect peer in an adjacent market with similar growth and profitability should trade at a similar multiple. A much larger indirect peer, however, might trade at a premium due to scale; you might discount it by 10–20%. Always explain any adjustment.

Q: Can I segment my indirect peers by market or segment?

A: Yes, especially if your target competes in multiple segments. You might use one indirect peer set for the CRM-focused business and another for the billing software business, then weight the two valuations based on revenue contribution. This is more rigorous than lumping all indirect peers together.

Related concepts

• Market structure and competition: How industry concentration and competitive dynamics affect multiples
• Peer set transparency: Clear disclosure of direct vs indirect peers and the rationale for inclusion
• Valuation range: Direct peers anchoring the core value, indirect peers defining the range
• Business model similarity: The key dimension connecting direct and indirect peers
• Geographic and segment adjustments: Tweaking multiples when peers differ on these dimensions

Summary

Direct and indirect peers serve different purposes. Direct competitors are the most comparable; use them when available and abundant. Indirect peers in adjacent markets with similar business models add depth and diversity when direct competitors are scarce. Always disclose which peers are direct and which are indirect, and explain the rationale. Weight direct peers more heavily; use indirect peers as a secondary check. If you are forced to rely primarily on indirect peers, supplement with transaction comps and DCF to triangulate a reasonable valuation. Transparency and defensibility are more important than appearing to have a perfect peer set; acknowledge the limits of your peers, and stakeholders will trust your valuation more.

Next

Read the next article, Including international peers, to learn how to incorporate global competitors into your peer set and account for differences in accounting, regulation, and market structure across borders.