Precedent transaction analysis (precedents)

Definition

Precedent transaction analysis (precedents) is a valuation method used to estimate the value of a company by analyzing the prices paid for similar companies in past transactions. It involves identifying and analyzing comparable transactions to derive multiples that can be applied to the target company.

5 Must Know Facts For Your Next Test

1. Precedent transaction analysis relies on historical data of similar companies' acquisitions to determine valuation metrics.
2. Key multiples often used in precedents include EV/EBITDA, EV/Sales, and Price/Earnings ratios.
3. The method assumes that past transaction values are relevant indicators of current market conditions.
4. It provides insights into market trends and investor sentiment at the time of those transactions.
5. One limitation is that it may not account for unique circumstances or synergies specific to each individual transaction.

Review Questions

• What are some common multiples used in precedent transaction analysis?
• How does precedent transaction analysis help in understanding market trends?
• What is one major limitation of using precedent transaction analysis?

Related terms

Comparable Company Analysis (Comps): A valuation method where a company's financial metrics are compared with those of similar public companies.

Discounted Cash Flow Analysis (DCF): A valuation technique that projects future cash flows and discounts them back to present value.

Enterprise Value (EV):

A measure of a company's total value, often used as a more comprehensive alternative to market capitalization.