Precedent Transactions Analysis: The Guide to Creating an Excel Model

Using Trading Comparables techniques is just one technique in valuing a company. Another method you can use is the Precedent Transactions modeling.

Precedent transaction assumes that given same circumstances, the value of the company you are analyzing is about the same as the acquisition value of a company that was recently acquired.

Instead of using market values, the analyst uses acquisition values. Thus, the multiples of Precedent Transactions is typically higher than those of Comparable transactions because of Control Premiums.

This guide will help you create an Excel Model for Precedent Transaction Analysis. Well, you can download the Excel counterpart and use it as a template, but, upon finishing this guide, you will be able to create a model of your own.

Download the Excel counterpart of this guide because we will be using that to explain how to create your own Excel Model.

Let’s start with this question:

When should we use Precedent Transactions Analysis?

Uses of Precedent Transactions Analysis

There are different ways you can use Precedent Transactions such as:

  1. To provide an informed opinion as to the value of a certain company that is a target of an M&A or consolidation. This is true whether you are the advisor of the target company or the acquiring company.
  2. To value a company based on the market demand for acquiring a company rather than basing on an Exchange.
  3. To estimate the value of a company that does not have public trading comparables.
  4. For use in identifying possible buyers or potential sellers in a certain business sector.

As you gain more knowledge and experience, you might find other uses for Precedent transactions. But, you should be aware that using this method presents its own advantages and shortcomings.

Advantages and Disadvantages of Precedent Transactions Analysis

Precedent transactions Analysis provide realistic valuations of companies.

For example, if Company A and Company B are similar, and Company C bought Company A at $50 Million, then it’s reasonable to value Company B at $50 Million also. We can, therefore, use multiples of Company A to estimate the value of Company B.

This model can also help analysts determine possible future acquisitions. For example, if the model revealed that Company A is a good buy and that Company B is in a position to buy A, we can expect a possible business acquisition. This information could help us get a better view of the values of both Company A and B. Furthermore, the data we gathered can help us in actual M&A negotiations and discussions.

The multiples we can produce does not simply reflect supply and demand pressure but rather, real-life deals. In a sense, we are getting more realistic valuations of companies.

Another advantage of using Precedent Transactions is that it is based on the publicly available public information. This information is usually subjected to high levels of standards before getting to the public, therefore we can guarantee the accuracy of these data.

On the other hand, Precedent Transactions present some disadvantages.

One of which is that publicly available information is usually based on past transactions that are not totally reflective of current market conditions. To mitigate this risk, we need to aid our interpretations with knowledge of present day circumstances.

Another thing to look out for is the difference between the market climate at the time of the deal, and at the time the model is being made. Those differences could be significant and can make our conclusions misleading.

It is hard to find comparable Precedent transactions analysis, that is, all companies are unique on their own. There will always be the risk that the valuations we gathered from Precedent transactions analysis don’t actually match the conditions of the company we are evaluating.

Suggested: Read more about Financial Modeling Examples

Difference between Precedent Transactions and Trading Comparables

The basic difference between the two is that instead of using market-driven values, Precedent transactions use the acquisition prices of comparable real-life acquisitions and divestitures. Trading comparables on the other hand base the valuations on how comparable companies are being valued in the market.

Control Premiums

This is the premium paid to gain control of the target company and not just merely be part of the equity.

Premiums also represent the unrecorded values of a company such as brand recognition, technical expertise or potential continuous increase in earnings.

You can compute Premium Paid by percentage using the following formula:

Premium (%) = [(Acquisition Price - Last Trading Price) / Acquisition Price] x 100.

For example, if a company is trading $50 per share before acquisition announcement, and the price paid was $60 per share, then the premium paid was 20%.

Now that you know the basic stuff about Precedent transactions Analysis, we will now move on to the practical part. In the next post, we will now be starting to create an Excel model for Precedent Transactions Analysis.

Precedent Transactions Analysis: The Guide to Creating an Excel Model 1
Precedent Transactions Analysis: The Guide to Creating an Excel Model 2
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