How do you validate and cross-check your precedent transaction valuation with other methods?

Usually, deal multiples are not reported in the public domain. Industry intelligence portals often calculate The multiple based on consideration and latest available financial information. In reality, the deal multiples may be based on Revenue, EBITDA, ARR, future capacity additions. There may be different methods of calculations for different services / products of the target. One should remember that these reported multiples are useful for arriving at an indicative value but the actual deal is based on negotiated numbers on a a business case.

Multiple Methods: Use various valuation techniques like discounted cash flow (DCF), comparable company analysis (CCA), and precedent transactions. Consistency Check: Ensure the values derived from different methods are consistent with each other. Benchmarking: Compare your precedent transaction valuation with recent similar transactions in the industry. Sensitivity Analysis: Test how changes in assumptions affect the precedent transaction valuation to assess its reliability.

It’s important to note that in most deals, valuation multiples are not disclosed. Sometimes these platforms calculate their own multiples using publicly available information such as Day 1 purchase consideration which can be incorrect and the multiples can often differ between platforms. It is important to recalculate these multiples and cross check the information before using them. Lastly, very important is to ensure that it is absolutely clear (and not assumed) which multiple is being picked - EV/EBITDA or Equity Value/EBITDA as it can change your valuation significantly.

When considering precedent transaction valuations, it's crucial to ensure accuracy and reliability through robust validation and cross-checking methods. One effective approach involves comparing the valuation derived from precedent transactions with alternative methodologies. This can include discounted cash flow analysis, market multiples, or industry benchmarks. By triangulating results from different approaches, one can mitigate potential biases and uncertainties inherent in any single method. This comprehensive validation process not only enhances the credibility of the valuation but also provides a more holistic understanding of the company's worth in the context of the market landscape.

Choosing comparable transactions is key to a solid valuation. Start by identifying deals similar to the company you're valuing in terms of industry, size, and financial performance. This helps ensure that the valuation reflects realistic market conditions. Use databases like Bloomberg or Thomson Reuters to find relevant transactions. Adjust for factors such as control premiums or market fluctuations to get a precise comparison. Accurate selection and adjustment of these transactions lead to a more reliable and relevant valuation.

Firstly, when using multiples, make sure that your numerators and denominators are consistent. For instance, if you use Enterprise Value then you should use metrics that are free of the effect of leverage such as Revenue and EBITDA/ EBIT. If you use Equity Value then Book value or Earnings can be adopted. Secondly, make sure to deal with non-recurring/non-operating items in your analysis as they can significantly distort results. Thirdly, beware of averages, mean, median or mode can be vastly different numbers. Lastly, precedent transaction valuation is particularly vulnerable to data quality issue due to the lack of public information on the specifics of the deal so it should never be used as the primary method for valuation.

To validate and cross-check precedent transaction valuations, calculating valuation multiples is essential. Begin by selecting comparable transactions within the same industry, ensuring they reflect similar operational and financial characteristics. Compute valuation multiples such as EV/EBITDA, P/E, and Price/Sales for these transactions. Compare these multiples with those of the target company to determine if they fall within a reasonable range. Cross-verify these multiples with results from DCF and comparable company analyses to confirm consistency. Address any discrepancies by revising assumptions or adjusting for unique transaction-specific factors, ensuring a robust and reliable valuation.

To validate and cross-check your precedent transaction valuation, compare it with other methods for a comprehensive analysis. First, apply the Discounted Cash Flow (DCF) method, which evaluates the intrinsic value based on projected cash flows. This provides a benchmark against the transaction multiples. Second, use Comparable Company Analysis (CCA) to check if the valuation aligns with market standards by comparing similar publicly traded companies. Finally, consider Asset-Based Valuation to assess the value of the company’s assets and liabilities. By integrating these approaches, you ensure a well-rounded valuation that corroborates the transaction data with broader financial perspectives.

By comparing your transaction valuation with other methods, like discounted cash flow (DCF) and comparable company analysis, ensures accuracy. On the other side, precedent transactions offer historical perspectives. DCF provides insight into future cash flows while market multiples reflect current market conditions. Cross-checking with these methods helps us to verify if our valuation is reasonable and consistent. Significant deviations may indicate the need for adjustments in assumptions or methods. It ensures a balanced and reliable valuation outcome.

Every company is different, and no valuation is 100% accurate in determining "this is what the company is worth." For example, a certain strategic acquirer might ascribe a unique value to a certain intellectual property asset the target company owns, driving its resulting assessment of value 2x-3x higher than any other potential acquirer might be willing to pay. Best practice: always point to a potential valuation range, rather than a single number.

Precedent Transaction valuation leads to price inflation which works until the result is absurd and deals break down. Advisors love it until they don’t.