Precedent Transactions (also known as 'Transaction Comps' or 'Deal Comps') is a method of Valuation that determines the value of a company by looking at the prices paid for similar companies in recent Mergers & Acquisitions (M&A) deals. Think of it like pricing your house by looking at what similar houses on your street have sold for recently. Investment bankers and analysts compile a list of these past 'precedent' transactions, calculate the valuation multiples (like the price paid relative to the target's earnings or revenue), and then apply the median of these multiples to the company they are trying to value. This method is part of a broader valuation toolkit that often includes Comparable Company Analysis (which looks at the current trading prices of public peers) and Discounted Cash Flow (DCF) analysis (which values a company based on its future cash flows). Transaction comps are particularly useful for understanding what a strategic acquirer might be willing to pay for a business as a whole.
At its core, Precedent Transactions Analysis is about finding a group of recently acquired companies that are as similar as possible to the one you're analyzing. The logic is that the M&A market provides a real-world benchmark for what a company is worth when someone is willing to write a check for the entire business.
The quality of this valuation method depends almost entirely on the quality of the “comps” you select. Sloppy comparisons lead to a garbage-in, garbage-out result. Analysts hunt for transactions with similar characteristics, typically focusing on:
Once a list of comparable transactions is assembled, analysts calculate valuation multiples from each deal. The goal is to see what buyers were willing to pay relative to a key financial metric. The most common multiple is:
Other multiples, like EV / Sales or the classic P/E Ratio, might be used depending on the industry or the specific situation (e.g., for unprofitable tech startups where earnings are negative). The analyst then typically takes the median or average of these multiples and applies it to the target company's own EBITDA or sales figure to arrive at an estimated value.
While a useful tool in the world of corporate finance, individual value investors should approach Precedent Transactions with a healthy dose of skepticism. It tells you the price someone paid, but not necessarily the value they received.
This is the single most important caveat. When one company buys another, the buyer almost always pays more than the market price per share. This extra payment is called a Control Premium. They are paying a premium for the benefit of having total control—to integrate operations, fire management, or change the company's strategy. As an individual investor buying a small number of shares on the stock market, you get no control. Therefore, valuing a stock based on multiples that include a control premium is a classic mistake. It can systematically lead you to over-estimate a company's Intrinsic Value and, consequently, to overpay. You're pricing the stock as if you were buying the whole company, which you are not.
For a value investor, Precedent Transactions analysis is best used as a reality check, not a primary valuation tool.
Precedent Transactions analysis is a powerful method for understanding what the M&A market thinks a company is worth. It provides a real-world price tag based on actual deals. However, for the ordinary value investor, it's a tool to be handled with care. Its built-in control premiums can be dangerously misleading. It's best used as a secondary check to complement a more fundamental analysis of a business's own cash-generating power, helping you understand the market's psychology without being fooled by it.