How to determine your walk away price using multiples
From my understanding transaction multiples give you the price range you'd probably have to pay to acquire the target
However how do you determine the absolute top value that you'd pay for a firm i.e. the value of the firm including synergies?
I am aware that you can use the DCF, but is it possible to determine the highest price (i.e. value) using the multiples method?
Multiples are relative valuations for similar transactions/firms. There really is no "top value," as it's all relative. If you pay more than the highest comparable transaction multiple, you could say that is a premium compared to other transactions, but there are other considerations (size, liquidity, etc.) that really might not make it a true premium. Does that make sense?
In my opinion, it all comes down to the basic rules of supply and demand. Sometimes you'll have situations where your transaction might exceed all other comps in your comp universe because the acquirer wants to keep competition out, acquiring management has a strong preferential bias, or a host of other reasons. Conversely, if the demand is not there and your client's operations are so old that structures are literally collapsing, your client might be willing to take anything (hence, a floor on the price - and yes, this happens).
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