How can you compare growth prospects for precedent transactions and companies?

2 Use valuation multiples

Another way to compare growth prospects is to use valuation multiples, such as price-to-earnings (P/E), enterprise value-to-EBITDA (EV/EBITDA), or price-to-book (P/B). These multiples reflect how much the market is willing to pay for a unit of earnings, cash flow, or book value of the precedent transactions and companies. The higher the multiple, the higher the growth prospects, and vice versa. You can compare the multiples of the precedent transactions and companies to the target's multiples, or to the industry median or average. This will give you an idea of how cheap or expensive the precedent transactions and companies are, and how they are valued relative to their peers.

3 Use industry drivers and trends

A third way to compare growth prospects is to use industry drivers and trends, such as market size, demand, competition, regulation, innovation, or consumer preferences. These factors affect the growth potential and outlook of the precedent transactions and companies, and may differ from those of the target. You can research the industry drivers and trends of the precedent transactions and companies, and see how they have influenced or are expected to influence their performance and valuation. You can also compare them to the industry drivers and trends of the target, and see how they align or diverge. This will give you an idea of how attractive or risky the precedent transactions and companies are, and how they are positioned relative to their peers.

4 Use qualitative factors

A fourth way to compare growth prospects is to use qualitative factors, such as strategy, management, culture, reputation, or synergies. These factors affect the growth capabilities and opportunities of the precedent transactions and companies, and may not be captured by the financials or multiples. You can evaluate the qualitative factors of the precedent transactions and companies, and see how they have contributed or are expected to contribute to their growth and value creation. You can also compare them to the qualitative factors of the target, and see how they complement or conflict. This will give you an idea of how strong or weak the precedent transactions and companies are, and how they are differentiated relative to their peers.

Comparing growth prospects for precedent transactions and companies is not an exact science, but a skill that requires judgment and analysis. By using these four methods, you can gain a better understanding of the growth potential and value of the precedent transactions and companies, and how they compare to the target. This will help you make more informed and realistic valuation decisions in investment banking.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?