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Business Valuation: Deep Dive into Precedent Transaction Analysis

Business Valuation

In our previous article we discussed the multiple methods for calculating your business’ value. This article discusses precedent transaction analysis, which is a type of valuation method that uses data from other comparable companies that have recently been merged or acquired. Precedent transaction analysis relies on publicly available information, therefore, it is more common among public companies. Precedent Transaction Analysis is only as reliable as the information that is being analyzed. Therefore, if the deal is old or the comparable companies are too different from your company then the analysis will not be reliable. However, if the deal is recent and with comparable companies, this is a great way to determine the value of your company. This article will take you through the five steps of Precedent Transaction Analysis and show you a real-life example.

Before we dive into how to calculate the value of your business we are going to go through some pros and cons to this valuation method. Precedent transaction analysis is a great starting point when determining the value of your business. It is easiest with public companies because the information pertaining to the precedent transactions of comparable companies is easier to find. However, it is difficult to apply because the market conditions of the past may not be similar to the market condition in the present. This type of valuation method is great for a baseline valuation, however, it may need to be bolstered by another valuation method for more accurate results.

Step 1: All companies are unique, therefore, there will never be an exact comparison. However, the first step to Precedent Transaction Analysis is to find relevant transactions. This step is performed by selecting a universe of comparable companies. Comparable companies are companies similar to your own. Try finding companies with the same industry, and type (public, private, ect.) Next look at companies located in the same area, with the same size, product mix, deal size. It may be hard or impossible to find companies that meet all of these criteria. However, the more similarities you can find between companies, the more accurate your business valuation will be. Bloomberg has a M&A database that contains a lot of this relevant information.

Step 2: Once all the data has been collected, you can move on to the next step. The second step is to take all the data you just collected and start to analyze and refine it. Once you have created your universe it is important to comb through those companies’ deal-related and financial information. Once you locate this information you can remove transactions that don’t fit your current situation. If you are comparing private companies, this information may be impossible to find. However, if you are comparing public companies, this information can be found in press releases, equity research reports, or any other source that contains deal metrics. This step may take some time and diligence on your part.

Step 3: The third step is to determine a range of valuation multiples to compare the companies effectively. Using the same valuation multiples when comparing companies is key to getting accurate comparisons. In precedent transaction analysis, the most common multiples are EV/EBITDA and EV/Revenue. If finding data is too difficult, it may be useful to add in transactions that are much higher or lower than the average transaction. Using these types of outliers in your valuation is useful if you are having trouble finding relevant information.

Step 4: The fourth step is to apply the same valuation multiples to your own company. After you’ve decided the range of valuation multiples from past transactions, those same multiples can be applied to the financial information from your own company. Once you have all the relevant information from your own company (or the company in question), you can start to compare that data to the past transactions from comparable companies.

Step 5: The fifth and final step is to make a graph of all the information you have gathered. You will need to make a spreadsheet of the key statistics, ratios, and transaction multiples that you have collected.


Now we are going to go through a real life example. The names and numbers have all been changed to protect the identity of the company. Tony’s Pizza is a publicly traded company looking to merge with another pizza company to benefit from another company’s online and delivery infrastructure. The first step is to find comparable companies in this industry. Here, Tony’s Pizza is looking for companies that also sell pizza, located in the same area, and about the same size as their company.

Next, Tony’s Pizza needs to comb through the data from those comparable companies. In the second step, Tony’s Pizza will need to look through press releases, equity research reports to find metrics to compare to their own company.

The third step is to find the comparable valuation multiples. Here, Tony’s Pizza is going to use EV/EBITDA. EBITDA is found by taking the net income from the company’s financial statements for the last three years and add back interest, taxes, depreciation and amortization from net income. This information may look like this. Sometimes you will find the data is not available or NA. Here is how you can navigate those problems.

Business valuation chart example


The fourth step is to calculate those same values for Tony’s Pizza. This will mean Tony’s Pizza has to look inward at their own financial information to find this information.

And finally the fifth step is to compare those multiples in a graph. Your graph, chart or spreadsheet may look something like this.

Business valuation chart example

In this step we can look at the other companies to find the highest, mean, median, and lowest values for each multiple. It will look something like this.

Business valuation chart example

These values will give you the information you need to value your business based on the precedent transactions of comparable companies. Spreadsheets like this one are easily accessible online and can help guide the information you need. Websites like Bloomberg or CapitalIQ are helpful when trying to find this information. Furthermore, it is important to keep in mind there will never be a comparable company exactly like yours. However, the closer you get the more accurate evaluation you will find.