Precedent transactions
Also known as: Transaction comps, Deal multiples
What was actually paid for similar businesses, control premium included. Facts, from a market that no longer exists.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
If you want to know what somebody will pay for a whole company, the most direct evidence is what somebody has paid for a whole company like it.
So you build a list of past transactions in the same business, find what each buyer paid relative to the target's profits, and apply those ratios to the company in front of you.
Unlike looking at share prices, these are actual completed purchases of entire businesses. That means they include the extra amount a buyer pays for control — the ability to change the strategy, replace the management, and run it differently. That premium is real and it is built into every number here.
The weakness is time. The deals happened months or years ago, when borrowing cost something different and buyers felt differently. Extending the list far enough back to have a meaningful sample usually means including transactions from a market that no longer exists.
- 1
Building the list2–5 days
Which transactions count: sector, size, geography, and how far back to go.
- 2
Finding the numbers3–7 days
Announced values and target earnings, dug out of announcements and filings that disclose unevenly.
- 3
Adjusting1–3 days
For the conditions at the time, the consideration used, and whether the process was competitive.
- 4
Applying1 day
The multiples paid are applied to the target, producing a range that includes a control premium by construction.
How far back — The analyst decides. Transactions from a different credit environment tell you about that environment, and going back far enough to get a sample usually means exactly that.
Is the data real — The public record decides. Private deals disclose selectively, so the set is biased towards transactions somebody wanted publicised.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The analyst | Neither | Decides which deals count and how far back to go. |
| The public record | Neither | Discloses unevenly, which biases the set towards transactions somebody wanted publicised. |
| The client | Both | Will prefer the precedents that support its own number, and says so. |
| The counterparty's adviser | Both | Has built the same analysis on a different list, and the two lists are the negotiation. |
- Desk
- Valuation & Deal Analysis
- Answers
- What buyers have paid for whole companies like this
- Includes
- A premium for control, by construction
- Weakness
- The prices were paid in a different financing environment
- Data
- Incomplete, because private deals disclose selectively
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricedecides it
- Financingmatters
- Approvalbarely applies
- Diligencedecides it
- Executionmatters
What decides it here. Two problems that cannot be fixed, only stated. The data is incomplete because private transactions disclose selectively, and the prices were paid in a different financing environment — so a precedent set large enough to be meaningful is usually old enough to be about a different market.
3 · IntermediateHow it runs in practice
Building the list
- Sector — close enough to be comparable, wide enough to have a sample.
- Size — small companies transact at lower multiples than large ones, consistently.
- Geography — different markets pay differently for the same business.
- Period — the shortest window that gives enough transactions.
Each of those choices moves the answer, and each is made before any arithmetic.
Where the numbers come from
Announcements, offer documents, and filings. Public-company acquisitions disclose properly. Private deals often disclose the price and not the earnings, or neither, and what does emerge is frequently what one side wanted publicised. The dataset is therefore biased in a direction nobody can correct.
Adjusting for what was paid with
A deal paid in shares is priced differently from one paid in cash, and both sides knew it. And the multiple paid depends on whether the process was a competitive auction or a bilateral negotiation — the same asset, sold two ways, reaches two prices. Where that is knowable it should be noted.
The premium, measured
For public targets, the premium to the undisturbed share price — before any leak or rumour — is itself a data set worth building. It is directly comparable across deals and it is what a target board will be shown when it is asked whether an offer is adequate.
4 · AdvancedThe numbers & the documents
Why the multiples are higher, decomposed
A control premium is not one thing. It contains:
- Synergies the buyer expects, part of which it has handed to the seller — see synergies.
- Control itself — the ability to change what the business does, worth something even without synergies.
- Competitive tension, where an auction pushed the price above what any single buyer would have offered.
- Overpayment, which is real and which no dataset separates from the other three.
A precedent set therefore encodes both what businesses are worth to buyers and how often buyers get carried away, and nothing in the method distinguishes them.
The financing environment is inside every number
When debt is cheap and plentiful, financial buyers can pay more — see the buyout model, where the maximum price is an output of the financing. A set of precedents from a period of loose credit is a set of prices that could not be paid today, and quoting them without saying so is the commonest way this analysis misleads.
The circularity nobody escapes
Precedent transactions were themselves priced partly off earlier precedent transactions. The method propagates whatever the previous generation of buyers believed, including their errors. It is a genuine limitation and it has no fix — only the discipline of asking whether the earlier deals worked out.
How to use it honestly
As one input among three, presented as a range, with the period stated and the conditions of that period described. A precedent analysis that says "similar companies have sold at eleven to fourteen times, mostly in a period when debt cost half what it does now" is useful. One that says "the multiple is twelve and a half times" is not.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Precedent transactions in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyFairness opinionDealA narrow statement, on a stated date, about one specific offer
- EasyTrading comparablesDealWhat the market pays for similar businesses today
- MediumDiscounted cash flowDealThe only method that values the business itself
- MediumValuationDeskThe arithmetic underneath every transaction: discounted cash flow, comparables, precedent transactions, the buyout…