Precedent Transaction Analysis: Mergers & Acquisition Comps valuation technique


Precedent Transaction Analysis is a valuation method also known as “M&A Comps,” “Comparable Transactions,” or “Deal Comps,” in which the price paid for the similar companies in the history is considered as an indicator of company’s value.

These transaction analyses are very useful for the share market investors who rely on serious analysis work when they need to choose a particular stock or shares.

Understanding Precedent Transaction Analysis better:

The estimation of the valuation of current assets from the past transactions is used in the precedent transaction analysis method. The following details are required by the investors to understand the impending deal:

  • Precedent Transaction analysis assists in figuring out the payables and multiples in a particular company or industry.

  • This process helps buyers to arrive at the conclusion that how other parties can arrive at the accurate market valuations.

One of the major drawbacks of these transaction analyses is that buyers cannot emulate market conditions that prevailed in the past. Since the market conditions may have changed drastically after and thus any valuation derived from the past transactions is not always accurate.

Any data or conclusion derived from these analyses must only be considered as a baseline valuation instead of an accurate representation of the shares. The investors need to employ further intricate studies to determine the exact market value of the stocks at the time of acquisitions.

Steps used in calculating precedent transaction analysis

The four steps used in the precedent transaction analysis are as follows:

Step 1: Selecting the Universe of transactions:

The first step is to select the universe of historical transactions of the company to use for the purpose of valuation. You need to screen the history of transactions where the target company must be similar to the valuing company.

There are two ways to historically screen the company which are:

  • Work on the instructions given by the investment banking deal team or MD. For instance, your MD will tell you to look into these four kinds of transactions. Management team has the best insights on best transactions but it is the duty of an investment banker to figure out on their own.
  • Use bank resources that searches and screen for relevant criteria and input.

It is almost impossible to find a perfect precedent transaction because no company is going to be 100% similar, but you may narrow down your search using the following characteristics of the target company:

  • Sector
  • Product services
  • Customers
  • Distribution channel
  • Geography

Step 2: Locating Necessary Financials:

After having a universe of historical transactions, the second step is to find the financials to spread the multiples. The best way to understand and dig deeply into the financials is to pull the information gathered from the deal press release or SEC prospectus that is filed online at Bankers may pull the database from the Capital IQ or Factsheet when handling these “deal multiples”, but it is best to check the original sources.

The financial information includes:

  • Total deal amount paid by the acquirer: This is your enterprise value
  • Target Company Earnings per share (EPS)
  • Target Company market capitalization (Deal amount- net debt)
  • Target company earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • Target company total revenue.

Step 3: Spreading the Key trading multiples:

The next step after collecting the financials is to start spreading key deal multiples.

You need to analyze multiples such as:

  • Enterprise value/ sales
  • Enterprise value/ EBITDA
  • Stock Price/ EPS
  • Market Cap/ Book value

Step 4: Determining valuation:

The final step is to determine the valuation. Use the financial multiples of your universe by using the information in step 3 above to find the valuation of the company.

For instance, if the forecasting of the company predicts to have $200 million of EBITDA in the year 2021 and the precedent transaction analysis shows target companies purchased for 10x EBITDA then your company would have $2 billion worth approximately.

Pros and Cons of Precedent Transaction Analysis


Precedent transaction analysis is used with other methods to achieve the desired results. It offers a general idea about the price of a share or stocks. Investors need to assess the current market conditions before solely relying on this method.

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