When building a DCF/M&A/LBO to figure out Terminal Value/Offer Value/Offer Value do we typically use the market multiples we get through comps sheets or transaction multiples from precedents that have happened well in the past?
Some context: This is for a pitch competition I'm taking part in my school and valuing a family owned private business, as of now.
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How long ago is well in the past >5 years?
2007 is oldest
why well in the past? if strategic buyer use precedent transactions, if financial buyer use comps
this good luck!
Thanks! I used that phrase since in school I was normally taught to use 1-2 years of precedants but i just couldn't compile enough. Thanks a lot, once again. I appreciate your input!! !
The two most common terminal valuation methods are public comps and perpetual growth method (capitalize terminal cash flow at long-term discount rate less long-term growth rate).
Precedent transactions are meant to show the premium paid in a change of control. If all your precedents are quite old, the multiples become less relevant, especially if the public comps have moved materially. An acquirer will have to pay a premium (likely ~20%) to public market.
I've never seen anyone use a precedent transaction multiple with a baked in control premium as the terminal value. Although I suppose that's a creative way to bump up the implied value in a pitchbook...
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