Precedent transactions are one part of comparable analysis. It is the analysis of previous transactions which have taken place involving companies of similar market cap / revenue / location / industry to the company being valued. The idea being that similar companies should be traded at similar multiples, so if you can find out what multiples similar companies have been sold / purchased at, you can apply an average of those multiples to the company and approximate a valuation. Using precedent transactions is useful because it is based on readily available public information, can assess market demand for certain types of companies, and can give an idea as to which other entities in the market may be willing to participate in the transaction being proposed. Unfortunately there are some limitations to using precedent transactions. Some of these are that premiums paid have to be eliminated, the data available on the transactions may not be fully inclusive, the business and economic cycle will greatly affect valuations and transactions, and that it is extremely difficult to compare one transaction exactly to another, and therefore there is a degree of approximation involved. The process for conducting precedent transaction analysis is as follows:
- Compile a full list of all transactions involving companies in similar industries and / or of similar size.
- Narrow down the list to have 5-10 transactions, preferably involving companies with similar revenues, market capitalizations, industries and geographical locations.
- Decide which multiples to use, the most common ones being Forward & Trailing EV / Revenue and Forward & Trailing EV / EBITDA.
- Calculate the average multiple values for the transaction companies and the values for your company.
- Apply the average multiples to your company to gain an idea of how it would be valued in a transaction.
To learn more about this concept and become a master at DCF modeling, you should check out our DCF Modeling Course. Learn more here.
To learn more about this concept and become a master at valuation modeling, you should check out our Valuation Modeling Course. Learn more here.
Module 1: Introduction
Module 2: Valuation: The Big Picture
Module 3: Enterprise Value & Equity Value Practice
Module 4: Trading Comparables Introduction
Module 5: Trading Comps: The Setup
Module 6: Trading Comps: Spreading Nike (NKE)
Module 7: Trading Comps: Spreading Adidas (ADS.DE)
Module 8: Trading Comps: Spreading Lululemon (LULU)
Module 9: Trading Comps: Spreading Under Armour (UA)
Module 10: Trading Comps: Benchmarking and Outputs
Module 11: Precedent Transactions: Introduction
Module 12: Precedents: The Setup
Module 13: Spreading Tiffany & LVMH
Module 14: Spreading FitBit & Google
Module 15: Spreading Reebok & Adidas
Module 16: Spreading Jimmy Choo & Michael Kors
Module 17: Spreading Dickies & VF
Module 18: Valuation Wrap-Up
Module 19: Bonus: Non-GAAP Practice
- Comparable Analysis
- Discounted Cash Flow (DCF)
- Earnings Before Interest, Taxation, Depreciation & Amortization (EBITDA)
- Enterprise Value (EV)
- EV / EBITDA
- Football Field Graph
- Investment Banking Division (IBD)
- Market Capitalization
- Pitch Book
- Public Comparable Companies
- Trading Multiple