How can you use precedent transactions analysis in PE deal negotiations?

1 Identify relevant transactions

The first step in precedent transactions analysis is to identify a set of comparable transactions that have occurred in the same industry, geography, and time frame as the target company. You can use various sources, such as databases, industry reports, news articles, and broker reports, to find relevant deals and their key characteristics, such as deal size, date, structure, and multiples. You should aim to select at least three to five transactions that are similar to the target company in terms of size, growth, profitability, and risk profile.

2 Calculate transaction multiples

The next step is to calculate the transaction multiples for each comparable deal, which are ratios that measure how much the buyer paid for the seller relative to some financial metric, such as revenue, earnings, or cash flow. The most common multiples used in PE are enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA), and EV to revenue. You can obtain these multiples by dividing the EV of the seller by its EBITDA or revenue at the time of the deal. You should also adjust the multiples for any non-recurring items, such as one-off expenses or gains, that may distort the true performance of the seller.

3 Apply transaction multiples to target company

The third step is to apply the transaction multiples to the target company's financial metrics to estimate its value. You can use either the median, average, or range of the multiples from the comparable transactions, depending on the degree of similarity and dispersion among them. You should also use the most recent and reliable financial data for the target company, such as its historical or projected EBITDA or revenue. You can then multiply the selected multiple by the target company's financial metric to get its implied EV. You can also calculate its implied equity value by subtracting its net debt from its implied EV.

4 Use precedent transactions analysis in deal negotiations

The final step is to use the precedent transactions analysis in deal negotiations with the seller, investors, and lenders. This analysis can help you benchmark the target company's value against the market and justify your offer price. Additionally, it can identify key value drivers and deal synergies that make the target company attractive or unique compared to comparable transactions. It can also assess the competitive landscape and deal activity in the industry to determine the level of demand and supply for the target company. This information can help you negotiate the deal structure and terms, such as the mix of debt and equity, earn-out clauses, and escrow arrangements. Finally, you can use this analysis to communicate the rationale and value proposition of the deal to your investors and lenders in order to secure their approval and financing.

5 Benefits and challenges of precedent transactions analysis

Precedent transactions analysis has several benefits and challenges for PE deal negotiations. It reflects the market conditions and expectations at the time of the deal, captures premiums paid for control, synergies, and strategic value, and provides a realistic and objective valuation range based on actual transactions and observable data. It also allows you to compare the target company with its peers and competitors, as well as identify its strengths and weaknesses. However, it may be difficult to find truly comparable transactions that match the target company's characteristics and circumstances. Additionally, it may be affected by deal-specific factors and assumptions that influenced the buyer's and seller's decisions and valuations. Lastly, it may be outdated or inaccurate if the market conditions or the target company's performance have changed significantly since the comparable transactions.

6 Here’s what else to consider

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