1. Selecting Transactions
Again, the process is essentially the same as grading comps,
and we focus on the same business and financial characteristics.
However, there are two other factors we must consider,
first, we want recent deals as older transactions may not reflect current
market conditions for companies or assets. However, older deals may sometimes
be necessary in order to create a more robust valuation,
and second, it's important to know who is buying,
is it a strategic buyer that operates in the same or adjacent industry,
or is the buyer a financial firm, like a private equity firm?
All things being equal, a strategic buyer can pay more, since it will
more likely be able to realize synergies in an acquisition.
Synergies are typically cost savings in an acquisition,
for instance, the target company management may be let go.
After all the strategic buyer does not need two CEOs, two CFOs,
etcetera. Private equity firms are less likely to realize synergies
since they usually keep management in place to run the acquired company.
Finally, we tend to focus more on enterprise value when we perform a
precedent transaction valuation. This is because the enterprise value is
the effective purchase price of the company. For example,
the equity owners sell the business usually at a premium,
but the buyer must also usually pay off the target company's debt.
This is what we mean by saying the enterprise value is the effective
purchase price of the company. Now, let's get back into Excel
and work through a precedent transaction valuation.
2. Let's practice!