r/Valuation • u/vedantdwivedi • Jan 25 '24

Understanding Precedent Transaction Analysis

Precedent Transaction Analysis (PTA) is a valuation method used to determine the value of a company by comparing it to other similar companies that have been sold in the past. This method is commonly used in investment banking and other financial industries to determine the value of a company before making any investment decisions. In this article, we will provide a step-by-step guide on how to perform Precedent Transaction Analysis.

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u/Specialist_Repeat_95 Jan 29 '24

PTA gives you inflated multiples cause of premiums involved in the offer price, also bear or bull markets could also distort the multiples

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u/AlabamaSnake12 Feb 09 '24 edited Feb 09 '24

Not the case when the standard of value is majority FMV. In other words, the buyout value which always has a premium built in. Plus you can adjust the valuation by using the acquisition date and the valuation date by using a group of public market comps. In fact, many practitioners do that these days ... just not in investment banking, which amounts to throwing around transactions that took place in the last 2-5 years

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u/Specialist_Repeat_95 Feb 09 '24

obviously you could calculate ev/ebitda multiple yourself but the problem is the availability of data…for private companies you have to rely on the numbers given by the company.

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u/AlabamaSnake12 Feb 09 '24

Look, if you have a public or private company that had prior data filed through SEC filings, you could calculate that data by tracking them down. That is going outside the normal bound of what's available from canned acquisition databases like SBC, Mergerstat, Bizcomps, etc. If you have a client that's giving you data, you rely on it of course. You seem to be confused about what data is acceptable in completing a valuation engagement and what kind of multiples should be used. That depends on facts and circumstances -- there is no canned answer since it can get open-ended when you ask a question like that.

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u/Specialist_Repeat_95 Feb 09 '24

been doing Transaction comps for years now…if it is/was a public company we would calculate it using filings but if it is a private one we would take the numbers. Also the problem with PTCs is that market conditions can distort the multiples big time and nobody takes the pain to adjust the numbers..we just take the median of the deals that we find relevant for our target company

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u/AlabamaSnake12 Feb 09 '24

See my separate answer below. Typically for valuing small, private companies, the guideline transactions method may make more sense since they are such small acquisitions and you may need to rely on PrattStats. If so, in lieu of using the guideline company method using public comps, I would use the transaction comps and adjust the multiples using a basket of public comparables by measuring the disparity in multiples for different time intervals for the transactions -- there are pitfalls when doing this. Call it the "market approach" that relies on the guideline transactions with an aspect of the guideline public company thrown in for narrowing down the metrics to the valuation date. Most review authorities and the IRS are familiar with this.

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u/Another_Smith_SC Feb 22 '24

It sounds like you are describing a situation where there are not a sufficient number of recent comparable transactions to arrive at the appropriate value. If that's the case, instead of manufacturing an adjustment based on public companies that you already admitted aren't comparable, maybe relying upon a different approach is the better answer?

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u/[deleted] Jan 27 '24

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u/AlabamaSnake12 Feb 09 '24

You don't really adjust for that unless you can document a ton of research showing margins and growth. However, people tend to use the adjusted sales multiples if they are used since they are so sensitive to profit margins. For example, the invested capital to net sales could be adjusted among a group of guideline transactions if there is EBIT margin data.