Transaction Multiple

Intermediate

A transaction multiple is a valuation ratio derived from the price paid for a company in an actual acquisition, such as the deal's enterprise value divided by the target company's earnings before interest, taxes, depreciation and amortization.

Transaction multiples show what buyers have actually paid for similar businesses. Analysts use them to estimate what a company might be worth in a sale.

For example, if a buyer acquires a company for an enterprise value of 600 million and the company's annual EBITDA is 60 million, the transaction multiple is 10 times EBITDA. If a similar company with EBITDA of 40 million is being considered for sale, this suggests a possible enterprise value of around 400 million.

Common transaction multiples include enterprise value to EBITDA, enterprise value to revenue and price to earnings. Analysts typically collect multiples from several comparable deals, called precedent transactions, and look at their average or range.

Transaction multiples are usually higher than the trading multiples of similar listed companies, because buyers typically pay a control premium for taking control of the business and capturing synergies. They also reflect conditions at the time of each deal, such as interest rates and the level of competition among buyers, so older transactions may be less relevant.

For worked examples and full lessons, visit notesbysara.org.