Comps and Precedent Transactions
IB · Valuation / DCF
Relative valuation: peer selection, multiples, control premiums, and the football field.
Trading comps and precedent transactions
Relative valuation in one sentence
Comparable companies ("trading comps") and precedent transactions value a business by asking what similar assets are worth today, expressed as multiples of a financial metric.
How to answer in an interview
"I'd pick 5–10 peers on industry, size and growth, compute EV / EBITDA and P / E on LTM and forward numbers, and take a range around the median. For precedents I'd use deals from the last few years in the sector; those multiples are usually higher because of the control premium. I'd apply both ranges to the target's EBITDA, subtract net debt, and divide by diluted shares."
Drawing diagram…
Screen for comparable companies on industry, size, growth, margins and geography. Trading comps use public peers' current multiples such as EV/EBITDA and P/E; precedent transactions use the multiples paid in past acquisitions, which include a control premium and so are usually higher. Choose a range around the median, for example 8.0x to 10.0x, and apply it to the target's EBITDA of 50 for an implied enterprise value of 400 to 500. Subtract net debt of 100 for equity value of 300 to 400, or 15.00 to 20.00 per share on 20 million diluted shares.
Common pitfall
WACC is an opportunity cost, not a negotiating position. Unlever the beta, then relever for the target structure — mixing levered and unlevered figures is the classic slip.