What is a precedent transaction analysis?

Precedent transaction analysis is a valuation method used primarily in mergers and acquisitions. It involves evaluating past transactions that are similar in nature to the company or asset being assessed. By examining these previous deals, analysts can derive valuation multiples, such as price-to-earnings or enterprise value-to-EBITDA ratios. This allows them to determine a range of potential values for the target company based on how similar companies have been valued in the market during actual transactions.

This method is particularly useful because it provides context based on real market behavior rather than theoretical models or projections. Additionally, it can reflect current market conditions and investor sentiment, making it a practical approach for valuation in the ever-changing financial landscape. Understanding the rationale behind chosen multiples from these past transactions further informs and strengthens the valuation process for current and future deals.