As companies buy, sell and merge with others, there is a lot of action that occurs behind the scenes. Needless to say, knowing the enterprise value of other companies’ assets, liabilities and overall worth takes lots of work and often multiple types of analysis. Knowing what type of analysis is required for certain situations is key, and similar to other types of purchasing, having the skills to research (and knowing what to research) can make an incredible difference. One important method of researching a company’s worth is precedent transaction analysis.


Precedent Transactions Analysis Definition

Precedent transactions analysis (along with comparable company analysis and the DCF model) is one of the “Big Three” valuation methods for a company. Of those three methodologies, precedent transaction analysis is the least used, usually failing in the “optional” or “supplemental” category. Simply put, it is similar to “comps” in the real estate milieu and is a company valuation method to help estimate by researching and analyzing recent prices that were paid in comparable transactions.


Note: Precedent transactions are also known as the following: 



Why Is Precedent Transaction Analysis Used?

Precedent transaction analysis is most often used when a business is trying to ascertain the enterprise value of another one, commonly during a due diligence phase of an M&A transaction. In most instances, the analysts who work on precedent transaction analysis deals usually are working in the investment banking, corporate development and private equity fields.


The Precedent Transaction Analysis Process

There are multiple steps to the process. They include the following.


1. Search for Similar Company or Relevant Transactions

The first step is to research transactions that have occurred (hopefully recently) in the same industry. There are a large number of criteria to consider, including industry classification, type of company (public or private), all financial metrics, geography, company size, range of products, information about the buyer (competitor, private equity, etc.), size of the deal and valuation, among other factors.


2. Analyze Transactions

Once the transactions mentioned above have been recorded, the analysts have to narrow the scope and take away the data that has no relevance to the current transaction.


3. Determine the Range of Valuation Multiples

Following the above two steps, the average (or the selected range) of the valuation multiples must be calculated. Typically, this falls into the financial expert’s sweet spot, dealing with such formulas as EV/EBITDA and EV/revenue.


4. Apply the Valuations Listed Above

Once the range of valuation multiples from the data gleaned in step one above has been determined, those same ratios can be applied to the transaction at hand. Again, this is in the wheelhouse of the financial experts involved in the transaction.


5. Record and Graph the Results

Finally, once all the above information has been determined, it’s time to record the results in a manner that’s easily understood by all parties involved in the transaction. These valuations typically include a comparable company analysis, precedent transaction analysis, DCF analysis, ability-to-pay analysis and, if it’s a publicly traded company, a 52-week high/low metric.


The Pros and Cons

Like virtually every type of pricing method, precedent transaction analysis has its own set of pros and cons. They include the following.



  • Typically based on public information
  • Implied value is based on prices paid to buy similar companies
  • The multiples-based approach, using the “control premium” estimate, tends to be helpful
  • Comps can be used as a baseline for both parties
  • Clarifies market demand for specific types of assets



  • Public information can be limited and difficult to analyze
  • Assumes that buyers are rational, despite often overpaying in similar circumstances
  • Sometimes there is limited data available on comps, resulting in longer (and costlier) transactions
  • There is often a lack of recent transaction comps available as reference points
  • Even “comps” can’t be directly comparable, as every similar company has its own unique attributes  


Necessary Tool for Precedent Transaction Analysis

Of course, dealing with M&As and corporate transactions requires a set of tools that will help streamline and expedite the process. A virtual data room (VDR) is a place where all parties involved in the transaction can store, share and edit documentation related to the deal. 


CapLinked, an industry leader in the VDR space, is a provider of secure virtual data rooms for all types of business transactions, including M&A deals that involve precedent transaction analysis. CapLinked VDRs feature a user-friendly interface that is compatible with virtually every OS, giving users the ability to upload and download documents from any type of computer, tablet or smartphone from anywhere around the globe. Start a free trial of CapLinked’s VDR solution today.


Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.



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