Precedent Transactions Cheat Sheet
Step-by-Step Process
Precedent transactions follow a structured workflow similar to comps, but sourced from completed deals rather than live trading data.
| Step | Action | Key Consideration |
|---|---|---|
| 1. Define Criteria | Set industry, size, geography, and time period filters | Deals older than 5 years may reflect different market conditions |
| 2. Screen Transactions | Use Capital IQ, Bloomberg, or MergerMarket to find deals | Include both public and private targets when data is available |
| 3. Gather Deal Data | Collect transaction value, enterprise value, and target financials | Use LTM financials at the time of deal announcement |
| 4. Calculate Multiples | Compute EV/EBITDA, EV/Revenue, P/E at deal price | These multiples include the control premium |
| 5. Analyze Range | Identify median, mean, and distribution | Exclude outlier deals (distressed sales, bidding wars) |
| 6. Apply to Target | Multiply target financials by transaction multiples | Result represents what a buyer should pay for control |
Key Transaction Multiples
| Multiple | Formula | When to Use |
|---|---|---|
| EV / LTM EBITDA | Deal Enterprise Value ÷ Last 12 Months EBITDA | Most common — works across most industries |
| EV / LTM Revenue | Deal Enterprise Value ÷ Last 12 Months Revenue | Pre-profit companies, tech, SaaS |
| EV / NTM EBITDA | Deal EV ÷ Forward EBITDA (if available) | When targets had strong growth pipeline |
| Price / EPS | Offer Price per Share ÷ LTM EPS | Public-to-public deals with stable earnings |
| EV / EBIT | Deal EV ÷ LTM EBIT | When depreciation policies distort EBITDA |
Transaction Screening Criteria
| Filter | Typical Parameters |
|---|---|
| Time Period | Last 3–5 years (same market cycle preferred) |
| Deal Size | 0.5x to 3x the target’s expected enterprise value |
| Industry | Same SIC/GICS code or direct competitive set |
| Geography | Same region or comparable markets |
| Deal Type | Strategic acquisitions, financial sponsor deals, or both |
| Completion Status | Completed deals only (exclude withdrawn/pending) |
Control Premium Analysis
The control premium is what makes precedent transactions different from trading comps. Buyers pay extra for the right to control operations, strategy, and cash flow decisions.
| Premium Range | Typical Context |
|---|---|
| 10–20% | Friendly deals, negotiated transactions |
| 20–40% | Standard competitive processes |
| 40–60%+ | Hostile takeovers, bidding wars |
Precedent Transactions vs. Comps
| Dimension | Precedent Transactions | Comps |
|---|---|---|
| Valuation Basis | Historical deal prices | Current trading multiples |
| Control Premium | Included | Not included |
| Data Freshness | Historical (may be stale) | Real-time market data |
| Availability | Limited by deal volume | Abundant for public companies |
| Typical Result | Higher valuation range | Lower valuation range |
| Primary Use | M&A pricing, fairness opinions | General equity valuation |
Key Takeaways
- Precedent transactions value a company based on what buyers actually paid in similar M&A deals
- Multiples inherently include a control premium, producing higher valuations than trading comps
- Screen by industry, size, geography, and time period — stick to the last 3–5 years
- Always use the unaffected share price when calculating the control premium
- Combine with comps and DCF to triangulate a valuation range
Frequently Asked Questions
How many precedent transactions should I include?
Aim for 8 to 15 deals. Fewer than 5 makes the analysis statistically weak. If deal volume is thin in your specific sub-sector, expand to adjacent industries while noting the broader scope.
Why do precedent transactions typically give higher valuations than comps?
Because deal prices include a control premium — the extra amount a buyer pays for majority ownership and the ability to control the target’s operations, strategy, and cash flows.
How far back should I look for transactions?
Typically 3–5 years. Older deals may reflect different market conditions, interest rates, or industry dynamics. In active sectors you may have enough with just 2–3 years of data.
What databases are used to find precedent transactions?
S&P Capital IQ, Bloomberg, Refinitiv (formerly Thomson Reuters), MergerMarket, and PitchBook are the most common. Public filings (merger proxies, 8-Ks) provide additional detail on deal terms.
Should I include private deals in precedent transactions?
Yes, when financial data is available. Private deals expand your sample but often have limited disclosed financials. Use them when you have reliable data on deal value and target metrics.