How Do I Find Precedent Transactions?

 

Finding precedent transactions is crucial for accurate financial analysis, especially in mergers and acquisitions (M&A). These transactions provide valuable insights into the valuation of companies in similar industries or situations. This guide will walk you through the process of identifying and utilizing precedent transactions effectively.

Outline

1. Introduction

• Importance of precedent transactions
• Overview of the process

1. Understanding Precedent Transactions

• Definition
• Importance in financial analysis

1. Types of Precedent Transactions

• Mergers and Acquisitions
• Leveraged Buyouts
• Initial Public Offerings

1. Where to Find Precedent Transactions

• Financial databases
• Public filings
• Industry reports

1. Using Financial Databases

• Bloomberg
• Thomson Reuters Eikon
• PitchBook

1. Accessing Public Filings

• SEC EDGAR
• Company websites

1. Leveraging Industry Reports

• Professional associations
• Market research firms

1. Steps to Identify Relevant Transactions

• Define your criteria
• Use advanced search techniques
• Verify the relevance

1. Analyzing Transaction Data

• Key metrics to consider
• Normalizing data for comparison

1. Valuation Multiples

• Types of multiples
• How to apply them

1. Adjusting for Differences

• Industry-specific factors
• Economic conditions

1. Using Precedent Transactions in Valuation

• Incorporating data into models
• Adjusting for company-specific factors

1. Discount for Lack of Marketability (DLOM) Method

• Explanation of DLOM
• How Equitest utilizes DLOM
• Benefits of using DLOM

1. Common Challenges

• Data availability
• Differences in transaction structures

1. Best Practices

• Consistent criteria
• Cross-referencing multiple sources

1. Conclusion

• Recap of the process
• Final tips

1. FAQs

• How far back should I look for precedent transactions?
• What if I can't find enough relevant transactions?
• How do I handle transactions in different economic climates?
• Can I use international transactions as precedents?
• What are the limitations of using precedent transactions?

Article

Introduction

When it comes to financial analysis, especially in the realm of mergers and acquisitions (M&A), precedent transactions are like gold. They offer a benchmark for valuing companies by providing real-world examples of how similar businesses have been valued in the past. But how exactly do you find these valuable data points? Let’s dive into the step-by-step process to uncovering and utilizing precedent transactions.

Understanding Precedent Transactions

Definition

Precedent transactions, also known as comparable transactions or "comps," are past sales of companies or significant stakes in companies that can be used to value similar businesses. They serve as benchmarks for current valuations by providing insights into market trends and valuation multiples.

Importance in Financial Analysis

Using precedent transactions allows analysts to estimate the value of a company based on actual market data. This method is particularly useful because it reflects the prices that buyers and sellers have agreed upon in the real world, providing a realistic picture of a company's potential worth.

Types of Precedent Transactions

Mergers and Acquisitions

These are the most common types of precedent transactions used in valuation. They involve the purchase of one company by another and provide a clear picture of how much buyers are willing to pay for control.

Leveraged Buyouts

Leveraged buyouts (LBOs) are transactions where a company is purchased primarily with borrowed funds. They provide insights into how financial buyers, as opposed to strategic buyers, value companies.

Initial Public Offerings

While not a transaction in the traditional sense, IPOs offer valuable data points, especially in terms of market reception and pricing of shares when a company goes public.

Where to Find Precedent Transactions

Financial Databases

Financial databases are treasure troves of transaction data. They compile information from various sources, making it easier to find relevant transactions.

• Bloomberg: Offers comprehensive financial data, including detailed transaction histories.
• Thomson Reuters Eikon: Provides extensive market data and analytics.
• PitchBook: Specializes in private market data, including M&A, private equity, and venture capital transactions.

Public Filings

Many transactions, especially those involving public companies, are required to be disclosed in public filings.

• SEC EDGAR: The Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) is a database where companies file registration statements, periodic reports, and other forms required by the SEC.
• Company Websites: Companies often publish press releases and other transaction-related information on their websites.

Industry Reports

Industry-specific reports can provide insights into recent transactions and market trends.

• Professional Associations: Many industries have associations that publish regular market analyses and transaction summaries.
• Market Research Firms: Firms like IBISWorld and Forrester offer detailed reports that can include transaction data.

Using Financial Databases

Bloomberg

Bloomberg terminals provide a vast array of data. You can search for precedent transactions by using specific functions designed for M&A data, which allow you to filter by industry, date, deal size, and other criteria.

Thomson Reuters Eikon

Eikon offers similar capabilities, with powerful search and filtering options. It also provides detailed financials and transaction specifics that are invaluable for deep analysis.

PitchBook

PitchBook is particularly useful for private market transactions, offering data on deals that might not be disclosed in public filings. It’s a great resource for understanding the private equity and venture capital landscapes.

Accessing Public Filings

SEC EDGAR

The EDGAR database is a primary source for public company filings. By searching for specific companies or using advanced search options, you can find transaction details disclosed in 8-K, 10-K, or proxy statements.

Company Websites

Checking a company’s investor relations section can yield press releases and transaction announcements. These often provide the initial details and valuations used in the deal.

Leveraging Industry Reports

Professional Associations

Associations like the National Venture Capital Association (NVCA) or the American Institute of Certified Public Accountants (AICPA) often publish transaction data and analysis relevant to their industries.

Market Research Firms

Reports from firms like IBISWorld, Gartner, or Forrester can include transaction data and are particularly useful for understanding broader market trends and valuations.

Steps to Identify Relevant Transactions

Define Your Criteria

Start by defining what makes a transaction relevant. Consider industry, geography, deal size, and transaction type. This helps narrow down the vast amount of available data to the most pertinent examples.

Use Advanced Search Techniques

Most databases offer advanced search features. Use these to filter transactions based on your defined criteria. The more specific you can be, the more relevant your results will be.

Verify the Relevance

Not all transactions will be perfect matches. Verify the relevance by comparing the specifics of each transaction to your target company. Look at factors like financial performance, market conditions at the time of the transaction, and strategic rationale.

Analyzing Transaction Data

Key Metrics to Consider

When analyzing precedent transactions, focus on key metrics such as:

• Enterprise Value (EV): The total value of the company, including debt.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization.
• Revenue Multiples: The ratio of enterprise value to revenue.

Normalizing Data for Comparison

Normalize the data to ensure apples-to-apples comparisons. Adjust for differences in accounting practices, financial year-end dates, and other factors that might skew the data.

Valuation Multiples

Types of Multiples

Commonly used multiples include:

• EV/EBITDA: Useful for comparing profitability.
• P/E (Price-to-Earnings) Ratio: Helpful for assessing market valuation.
• EV/Revenue: Important for understanding top-line valuation.

How to Apply Them

Apply these multiples to your target company’s financial metrics to estimate its value. Ensure consistency by using the same multiples across similar transactions.

Adjusting for Differences

Industry-Specific Factors

Every industry has unique characteristics that can affect valuations. Consider factors such as growth rates, regulatory environment, and competitive landscape.

Economic Conditions

Adjust for the broader economic conditions at the time of the transactions. Economic booms or recessions can significantly impact valuations.

Using Precedent Transactions in Valuation

Incorporating Data into Models

Use the transaction data to build valuation models. Compare multiple transactions to derive a range of values, providing a more comprehensive view.

Adjusting for Company-Specific Factors

Make adjustments for specific factors such as company size, market position, and unique risks. This ensures that the valuation is tailored to the target company’s specific circumstances.

Discount for Lack of Marketability (DLOM) Method

Explanation of DLOM

In many cases, you can adopt the Discount for Lack of Marketability (DLOM) method. DLOM is used to reflect the reduced liquidity of private company shares compared to publicly traded ones. This discount accounts for the difficulties and potential time required to sell shares in the private market.

How Equitest Utilizes DLOM

Equitest, a financial analysis firm, employs DLOM in its valuation processes to provide more accurate and realistic valuations. By applying this method, Equitest ensures that their valuations consider the lack of immediate marketability of private company shares.

Benefits of Using DLOM

Using DLOM in your valuations provides several benefits. It helps create a more realistic valuation by accounting for the marketability challenges associated with private companies. This method improves the accuracy of valuations, making them more reflective of real-world conditions and enhancing their reliability for decision-making.

Common Challenges

Data Availability

Finding enough relevant transactions can be challenging, especially in niche markets or emerging industries. Be prepared to broaden your search criteria if necessary.

Differences in Transaction Structures

Transactions can vary widely in structure. Consider earn-outs, stock vs. cash payments, and other deal-specific terms that can affect valuation.

Best Practices

Consistent Criteria

Maintain consistent criteria throughout your search and analysis. This ensures comparability and reliability of the data.

Cross-Referencing Multiple Sources

Use multiple sources to cross-reference data. This helps verify the accuracy and completeness of the information.

Conclusion

Finding and analyzing precedent transactions is a nuanced process that requires attention to detail and a thorough understanding of financial data. By following the steps outlined in this guide, you can effectively leverage precedent transactions to inform your valuations and make more informed financial decisions. Remember, consistency and thoroughness are key to getting the most out of your analysis.

FAQs

How far back should I look for precedent transactions?

Typically, you should look at transactions from the past three to five years. However, the relevant time frame can vary depending on market conditions and industry trends.

What if I can't find enough relevant transactions?

If you can't find enough relevant transactions, consider broadening your search criteria or using related industries as benchmarks. You can also adjust for differences in economic conditions or transaction types.

How do I handle transactions in different economic climates?

Adjust your analysis to account for the economic conditions at the time of each transaction. Consider factors like interest rates, market volatility, and overall economic growth.

Can I use international transactions as precedents?

Yes, you can use international transactions, but be mindful of differences in market dynamics, regulatory environments, and economic conditions. Adjust your analysis accordingly.

What are the limitations of using precedent transactions?

The main limitations include data availability, differences in transaction structures, and the need for adjustments to account for company-specific and market-specific factors. Always use precedent transactions as part of a broader valuation approach.