Precedent Transactions Valuation

Precedent transactions valuation/ analysis

Precedent transactions analysis is a relative valuation method based on precedent transactions and key ratios/multiples within a sector. Common used ratios are EV/EBITDA and EV/SALES.

Step by step/ tutorial

This precedent transaction valuation tutorial is quite simple and straight on – to give you a good understanding of how a transaction valuation works. If you want to take your modeling to the next level I can highly recommend this modeling package (currently 15% off for BV-users!) which I believe is the best available financial modeling tutorial on the market.

1. Select the universe of comparable acquisitions

To start with, you should identify transactions made in your sector. If you have difficulties finding such transactions, try to find similar transactions in sectors similar to yours – that are affected by the same external effects as your company. For example, if you are producing windows and cannot find transactions between window manufacturers, try to find transactions made between real estates manufacturers for example.

Look for transactions in your region and the same size as your company! If you run a US company, choose transactions made in the US. If you run a global company, choose world wide mergers and acquisitions.

2. Locate the necessary deal-related financial information

If you have a database such as Bloomberg, Zephyr, MergerMarket or Reuters, this step is easy. If you do not have access to these types of resources, you will have to find annual reports, make searches on google or read specific company analyses and sector reports – to gather your data. Look for SALES, EBITDA, forecasts and Deal Values.

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3. Spread key statistics, ratios and transaction multiples

Now analyse your peer group and calculate key multiples. Commonly used multiples are EV/EBITDA, EV/SALES, EBITDA margins and growth rates.

4. Benchmark the comparable companies

Key multiples from our example:
Precedent Transaction Valuation

5. Determine valuation and output

Use the key financial numbers from the company you wish to value. For example, if your company had sales of 100 million in the last twleve months (LTM), this would imply an Enterprise Value of 50 million (0.5 x 100) in our example. If your company made an EBITDA of 10 million (LTM), this implies an Enterprise Value of 83 million (5.4 x 54).

The valuation range for this company is therefore in the range: 50 – 54 million!

What now? – Further reading

If you want to become a real Investment Banker and master financial models, I have two recommendations for you:

The first recommendation is by far the best financial modeling guide available on the market. If you can afford it you should get it, since it will help you understand all aspects of valuation. Link »

The other recommendation I have is the book “Investment Banking” by Rosenbaum and Pearl which is a fantastic book with some great tutorials and it is less expensive than previous mentioned tutorial. It describes the precedent transactions valuation approach as well as other valuation methods. Included with the book are also Excel templates.

Other Valuation methods

External guides and resources


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