Transaction multiples valuation | Definition

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hello everyone hi welcome to the channel of WallStreetmojo friends today we are
going to learn a topic that is transaction multiple valuation this is
one more a different way of valuing a company there's one DCF method there's
one comparable coms company waste valuation and there is another called
transaction multiple valuation which is also known as the precedent transaction
method let's get into the nitty-gritty of the same what exactly this is all
about seeing them for simple terms transaction multiples are the method
that is used to find out the value of the company under the transaction
multiple we look at various financial metrics like EV/EBITDA to find out
the value of a particular company what is the transaction multiple now okay
it's fine I will get there what exactly is transaction multiple which is used in
M&A see transaction multiple or at position multiple is a method where we
look at the past M&A which has taken place transaction and value the
comparable company using precedence now it is based on the premise that the
value can be estimated by analyzing the price paid by the acquirer that is the
the person who is going who is acquiring the company in comparable acquisition so
this actually this valuation method is usually used by financial analysts in
corporate development and like you it's also used by the PE form the private
equity forms also by the investment banking segments so transaction multiple
calculation see the above you know the question is how financial analyst you
know calculate the transaction multiple valuation now this has two answers one
is short and another is long in short it's all dependent on how they identify
similar business okay and look at their recent M&A and depends depending on that
they value the target company the long answer is little bit more detail and
let's elaborate it step by step approach the step one the step one goes something
like this you need to identify the transaction now we can identify
the transaction using using the sources something like this there's this thing
called company websites so go through the company websites go go through the
comparable companies press releases recent activity section and go through
the other general strategy section to see the transaction which the companies
discusses the most the second way to go about in this is you can go for
industries industries website again the same thing what you can do you can also
refer to the industry websites like you know the deal comm which contains almost
all the deals from various sectors then the another step that you can go for is
Bloomberg Bloomberg CACS if you have the excess of Bloomberg terminal then
you can also check out the CACS section of the comparable company the step two
in over here goes something like this step two is that you know you need to
identify the right transaction multiple now this is most important without this
you will fail in terms of evaluations before having much clarity let's look at
some of the factors the first factor is the time of the transaction see the most
important of filter you should use while looking at the emitter transaction is
the timing of each transaction and that transaction which should be really very
recent one second the revenue of the companies involved into into the
transactions so you need to go through the annual reports okay you know of the
if the company to find out the latest revenues
the idea is to choose the companies that are similar in the revenue and earning
the third is you can go for the type of business now this is one of the key
factor to look at you need to look at the business there are similar types it
means you should look at the products these services the target customers of
the business and select those business as comparables and finally choose the
location now the last factor you should look at the location of the comparable
business the similar location would justify because they then you would be
able to look at the regional factors and as well as you know you
can say that plus you can see what challenges those business in the same
location they have faced let's see the step three then you have to what you
have to calculate the transaction multiple so basically you need to
calculate so there are three multiple that you need to consider while looking
for the similarities in the previous transaction so this multiples may not
give a very accurate picture of the business but this multiples would be
conclusive enough to make a decision now the first and the foremost one is
EV/EBITDA the most preferred one this is one of the most common acquisition
multiple financial analysts use the reason investors finance professional
uses multiple is because the EV that is called the enterprise value and the EBITDA
before interest tax depreciation and amortization they both take debt into
account the right range is close enough to the right range of EV/EBITDA down range
to 6 to 15 X the next multiple that you can use is EV/Sales now this is
also another multiple that is used by the financial analyst an investor and
this multiple is significant for certain cases where EV/EBITDA does not work a
start-up has negative you can say aEV/EBITDA and that's why you can say small
business that's just got started and analyst use EV/Sales multiple now
this ranges between 123X the next is EV/EBIT now this is
another acquisition multiple that investors and financial analysts use and
it is important because it takes the wear and tear of the business now for
technology in consulting companies the companies that are not so capital in
self capital intensive EBIT and EBITDA does not make much difference EBIT
lesser than you can say the EBITDA down and because depreciation amortization
are adjusted in EBIT as a result EV/EBIT is usually higher than EV/EBITDA
and this will range between you can say 10 to 20 X now this is the list
that I'm going to show you which you know the acquisition details of the
comparable companies like you know in 2017 this company before that was a
target company crunching valuation draw off of the transaction that is in
millions is 2034 million the buyer the acquirer was hands down
limited and this was the three multiples that were been used in the similar
fashion crunch brush rush and and so on and so forth various other companies
that have been used and finally based on this you will do an average of all of
this and once you do the average you get 10.25 X 1.75 because these
are the comparable companies that you're using and based on based on that you
have evaluated various multiples and you get final data as average and median
over here so you need to screen out the right transaction and filter out the
rest and how would you do that you would look at the company's profile and would
understand the transaction closely and they will only choose the ones that fit
the bills so then you would use the right multiple and in in this case we
use three and apply the acquisition multiple and trying to value so the next
you value the company by using right acquisition multiple so the first you
will look at the right range of the acquisition multiple as they are highly
high and low depending on that the valuation would be done and then you
would have a low and high range valuation so you need to do do this for
all the comp companies come comparable transactions and then finally we will
create a chart to find out the comment rate and if the acquisition multiple of
your company let's say it's EV/EBITDA than the average of 10.25X
will apply to the target company now there are some advantage of the
transaction multiple valuation the advantage is that first anybody can
access the information so access is easy you can say access is quite easy because
it's public second since the valuation is done on the basis of the range it is
more realistic third since you are looking at the different players you can
understand the strategy of the same the fourth it is it also helps you to
understand the market better now some disadvantages we'll quickly discuss
the same the first is individual biases you can say are valuing the
target company would come into place and no one can avoid it
second even if the way even in various factors are taken into consideration
still there are many more factors that are not considered considered actually
in the valuation and even if the details our deals are compared no deal can be
exactly the same so there would be one or more factor that would be different

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Transaction multiples valuation | Definition | Steps to Calculate

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