Precedent transaction valuation analysis

Precedent transactions analysis valuation is a relative valuation method based on precedent transactions and key ratios/multiples within a sector. Precedent transaction analysis is a form of comparative asset (usually stock) analysis that is used with a company considered for takeover. The idea is that when your team has control of the outfit, they can implement changes that greatly improve the value of the asset.






Precedent transaction analysis

It is common that practitioners use multiples to find the value of the company they are interested in. When you want to analyze a company using a multiple, you should find a multiple that relates the enterprise value to a performance measure. Common performance measures are enterprise-value-to earnings before interest tax depreciation and amortization EV/EBITDA, EV/EBITA and earnings.

1. Select the universe of comparable acquisitions
2. Locate the necessary deal-related financial information (Commonly used ratios are EV/EBITDA and EV/SALES)
3. Spread key statistics, ratios and transaction multiples
4. Benchmark the comparable companies
5. Determine valuation and output

Recent M&A transactions are a more accurate reflection of the values buyers are currently willing to pay than acquisitions that happened in the distant past. This is because market fundamentals are constantly evolving and business cycles are changing.

You compare to similar takeovers. When done e someone very familiar with the operations of such business this can be the most accurate form of analysis. As such it is called an “art”, rather than cookbook formula crunching idiocy.

Other business valuation methods »

Precedent transaction analysis valuation tutorial »