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Precedent Transactions Method

Another way to value a company is the precedent transactions method. Using this method, you compile information on comparable transactions that have occurred and compare them to the transaction you are working on. For example, if I were working on a deal with American Express acquiring Open Table, I would review other American Express acquisitions and other acquisitions of the same variety. The criteria used to compare these transactions are relatively similar to that of the comparable companies method. Like the comparable companies method, it is an advantage that the precedent transactions method uses public information.

You would certainly look at the price paid in the deal, the type of deal it was, and the multiples the companies traded at. Since the deals you are comparing have already happened, you could say that the precedent transactions method is the most relevant valuation method.

To perform a precedent transaction analysis, you should start by compiling your list of transactions. Then, you should narrow these down to the ones you will be using for the analysis. You should look at discernible qualities such as sizes of the deals and market conditions at the time. Next, you should aggregate the relevant financial information about the deals. This includes price paid, the multiples for the deal, and other relevant statistics. Finally by taking the average and median of the multiples, similar to the comparable companies method, you can get a valuation for your company. For example if you determine that every company on your list traded at 10x earnings and your company has $100 million in EBITDA, the value of the company is $1 billion.

The problem with valuation method is that it is a control-based method. This means that it includes a control premium. A control premium is the price paid to take control of the company. This valuation method results in a higher valuation because of this control premium. There is also the problem of varying market conditions. The market was most likely in different states when each different deal occurred. Companies will get higher valuations during times of economic prosperity and lower valuations during times of uncertainty.

As with the other methods, you should use precedent transactions to help you zone in on an appropriate valuation. This method is a great reference point because the deals you are looking at actually closed. Since it provides you with a higher estimate for the range of valuation, you can have a good idea of what the value of the company is.

Evan Lebowitz writes on many topics including investment banking, valuation analysis, and precedent transaction analysis

By Evan Lebowitz