Precedent Transaction Analysis
IntermediatePrecedent transaction analysis is a valuation method that estimates a company's value by looking at the prices paid in past acquisitions of similar companies.
When a company is bought, the price paid reveals what a buyer was willing to pay for that type of business. Precedent transaction analysis gathers these deals and calculates the multiples they imply, such as the price paid divided by the target's EBITDA or revenue.
For example, if three similar businesses were acquired in recent years at enterprise values of 9, 10 and 11 times EBITDA, a company with EBITDA of 20 million might be valued at around 180 million to 220 million.
Prices in acquisitions usually include a control premium, the extra amount a buyer pays to gain control of a company. As a result, precedent transaction analysis often gives higher values than comparable company analysis, which is based on trading prices of small, non-controlling stakes. This makes it especially useful when valuing a company for sale.
The method has limitations. Finding truly comparable deals can be difficult, details of private transactions may not be published, and market conditions at the time of past deals may have been very different from today.
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