Precedent transaction analysis is a method of company valuationValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions. These methods of valuation are used in investment banking, equity research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and finance where past M&A transactionsMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we'll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs are used to value a comparable business today. Commonly referred to as “precedents”, this method of valuation is common when trying to value an entire business as part of a merger/acquisition and is commonly prepared by analysts working in investment bankingIBD - Investment Banking DivisionIBD is an acronym for the Investment Banking Division within the overall investment bank. IBD has responsibility for working with corporations, institutions, and governments to carry out capital raising (underwriting in equity, debt, and hybrid markets) as well as for executing mergers and acquisitions, private equityCareer Guide to Private Equity JobsThis career guide to private equity jobs provides all the information you need to know - positions, salary, titles, skills, progression, and much more. Private equity firms are investment management companies that acquire private businesses by pooling capital provided from high net worth individuals (HNWI) and institutional investors., and corporate developmentCorporate DevelopmentCorporate development is the group at a corporation responsible for strategic decisions to grow and restructure its business, establish strategic partnerships, engage in mergers & acquisitions (M&A), and/or achieve organizational excellence. Corp Dev also pursues opportunities that leverage the value of the company’s business platform..
This guide will break down the various components of precedent transactions and enable you to perform the analysis on your own.
Steps to perform precedent transaction analysis:
#1 Search for relevant transactions
The process begins by looking for other transactions that have happened in (ideally) recent history and are in the same industry.
The screening process requires setting criteria such as:
Industry classification
Type of company (public, private, etc.)
Financial metrics (revenue, EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company's profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples, net income)
Company size (revenueSales RevenueSales revenue is the starting point of the income statement. Sales or revenue is the money earned from the company providing its goods or services, income, employees, locations)
Product mix (the more similar to the company in question the better)
Type of buyer (private equity, strategic / competitor, public/private)
Deal size (value)
Valuation (multiple paid i.e. EV/Revenue, EV/EBITDA etc)
The above criteria can be set in a financial database such as Bloomberg or CapIQ and exported to Excel for further analysis
#2 Analyze and refine the available transactions
Once the initial screen has been performed and the data is transferred into Excel then it’s time to start filtering out the transactions that don’t fit the current situation.
In order to sort and filter the transactions, an Analyst has to careful “scrub” the transactions by carefully reading the business descriptions of the companies on the list and removing any that aren’t a close enough fit.
Many of the transactions will have missing and limited information if the deal terms were not publicly disclosed. The Analyst will search high and low for a press release, equity research reportEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in. The Equity Research Division is a group of analysts and associates. This equity research overview guide, or another source that contains deal metrics. If nothing can be found, those companies will be removed from the list.
#3 Determine a range of valuation multiples
When a short list is prepared (following steps 1 and 2) the average (or selected range) of valuation multiples can be calculated.
The most common multiples for precedent transaction analysis are EV/EBITDAEV/EBITDAEV/EBITDA is used in valuation to compare the value of similar businesses by evaluating their Enterprise Value (EV) to EBITDA multiple relative to an average. In this guide, we will break down the EV/EBTIDA multiple into its various components, and walk you through how to calculate it step by step and EV/Revenue.
An Analyst may exclude any extreme outliers such as transactions that had EV/EBITDA multiples much lower or much higher than the average (assuming there is a good justification for doing so).
#4 Apply the valuation multiples to the company in question
After a range of valuation multiplesMultiples AnalysisMultiples analysis involves valuing a company with the use of a multiple. Multiples analysis compares the company’s multiple with that of a peer company or from past transaction has been determined, those ratios can be applied to the financial metrics of the company in question.
For example, if the valuation range was:
5x EV/EBITDA (low)
0x EV/EBITDA (high)
And the company in question has EBITDA of $150 million,
The valuation ranges for the business would be:
$675 million (low)
$900 million (high)
#5 Graph the results (with other methods) in a football field
Once a valuation range has been determined for the business that’s being valued it’s important to graph the results so they can be easily understood and compared to other methods.
The Football field chartFootball Field Chart TemplateA football field chart is used to display a range of values for a business. Download our free Excel football field chart template and learn how to make one in Excel. The reason they're used is to visually show what the range of values for a business are and see where, an average, a target valuation lies compared to is the best way to illustrate the various methods on one page in a simple way.
The main valuation methods included in the chart are:
Comparable company analysisComparable Company AnalysisHow to perform Comparable Company Analysis. This guide shows you step-by-step how to build comparable company analysis ("Comps"), includes a free template and many examples. Comps is a relative valuation methodology that looks at ratios of similar public companies and uses them to derive the value of another business
Precedent transactions analysis
DCF analysis
Ability-to-pay analysis
52-week hi/lo (if a public company)
Football Field Chart TemplateA football field chart is used to display a range of values for a business. Download our free Excel football field chart template and learn how to make one in Excel. The reason they're used is to visually show what the range of values for a business are and see where, an average, a target valuation lies compared to
Download a free football field template hereFootball Field Chart TemplateA football field chart is used to display a range of values for a business. Download our free Excel football field chart template and learn how to make one in Excel. The reason they're used is to visually show what the range of values for a business are and see where, an average, a target valuation lies compared to.
Comparable company analysis vs precedent transaction analysis
Both methods are a form or relative valuation, where the company in question is being compared to other businesses to derive its value. However, “comps” are current multiplesValuationPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today. Commonly referred to as “precedents”, this method of valuation is used to value an entire business as part of a merger/acquisition commonly prepared by analysts that can be observed in the public markets, while “precedents” include a takeover premium and took place in the past.
The main similarities are:
Relative valuation
Use multiples (EV/Revenue, EV/EBITDAEV/EBITDAEV/EBITDA is used in valuation to compare the value of similar businesses by evaluating their Enterprise Value (EV) to EBITDA multiple relative to an average. In this guide, we will break down the EV/EBTIDA multiple into its various components, and walk you through how to calculate it step by step)
Hard to find perfectly comparable companies
Shows what a presumably rational investor/acquirer willing to pay (observable)
The main differences are:
Takeover premium (included in precedents, not in comps)
Timing (precedents quickly become old, comps are current)
Available information (difficult to find for precedents, readily available for comps)
DCF analysis vs precedent transactions
Discounted Cash Flow (DCF)DCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. DCF stands for Discounted Cash Flow, so the model is simply a forecast of a company’s unlevered free cash flow discounted back to today’s value. This free DCF model training guide will teach you the basics, step by step with examples and images analysis is a form of an intrinsic valuation performed by building a financial model in Excel. Unlike relative methods, it does not take into account what any other businesses are worth.
Financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and is a much more detailed and totally customized way to value a business. A financial forecast is made for the company by building up its revenue drivers, margins, cost structure, capital expenditures, and balance sheet items to determine its unlevered free cash flowValuationPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today. Commonly referred to as “precedents”, this method of valuation is used to value an entire business as part of a merger/acquisition commonly prepared by analysts.
To learn more, see our free financial modeling guideFree Financial Modeling GuideThis financial modeling guide covers Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF analysis, Excel modeling and much more. Designed to be the best free modeling guide for analysts by using examples and step by step instructions. Investment banking, FP&A, research, or our financial modeling courses.
Additional resources
This has been a guide to precedent transaction analysis. To keep learning more and advance your career in corporate finance, these additional resources will serve you well:
Types of financial modelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money
Walk me through a DCFWalk me through a DCFThe question, walk me Through a DCF analysis is common in investment banking interviews. Learn how to ace the question with CFI's detailed answer and guide. Build a 5-year forecast of unlevered free cash flow, calculate a terminal value, and discount all those cash flows to present value using WACC.
How to be a great financial analystThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Do you want to be a world-class financial analyst? Are you looking to follow industry-leading best practices and stand out from the crowd? Our process, called The Analyst Trifecta® consists of analytics, presentation & soft skills
Investment banking interview questionsInterviewsPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today. Commonly referred to as “precedents”, this method of valuation is used to value an entire business as part of a merger/acquisition commonly prepared by analysts
