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Transaction Multiples Valuation | Definition | Steps to Calculate - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo friends today we are
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going to learn a topic that is
transaction multiple valuation this is
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one more a different way of valuing a
company there's one DCF method there's
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one comparable coms company waste
valuation and there is another called
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transaction multiple valuation which is
also known as the precedent transaction
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method let's get into the nitty-gritty
of the same what exactly this is all
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about seeing them for simple terms
transaction multiples are the method
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that is used to find out the value of
the company under the transaction
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multiple we look at various financial
metrics like EV/EBITDA to find out
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the value of a particular company what
is the transaction multiple now okay
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it's fine I will get there what exactly
is transaction multiple which is used in
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M&A see transaction multiple or at
position multiple is a method where we
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look at the past M&A which has taken
place transaction and value the
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comparable company using precedence now
it is based on the premise that the
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value can be estimated by analyzing the
price paid by the acquirer that is the
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the person who is going who is acquiring
the company in comparable acquisition so
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this actually this valuation method is
usually used by financial analysts in
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corporate development and like you it's
also used by the PE form the private
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equity forms also by the investment
banking segments so transaction multiple
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calculation see the above you know the
question is how financial analyst you
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know calculate the transaction multiple
valuation now this has two answers one
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is short and another is long in short
it's all dependent on how they identify
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similar business okay and look at their
recent M&A and depends depending on that
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they value the target company the long
answer is little bit more detail and
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let's elaborate it step by step approach
the step one the step one goes something
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like this you need to identify the
transaction now we can identify
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the transaction using using the sources
something like this there's this thing
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called company websites so go through
the company websites go go through the
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comparable companies press releases
recent activity section and go through
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the other general strategy section to
see the transaction which the companies
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discusses the most the second way to go
about in this is you can go for
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industries industries website again the
same thing what you can do you can also
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refer to the industry websites like you
know the deal comm which contains almost
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all the deals from various sectors then
the another step that you can go for is
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Bloomberg Bloomberg CACS if you have
the excess of Bloomberg terminal then
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you can also check out the CACS section
of the comparable company the step two
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in over here goes something like this
step two is that you know you need to
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identify the right transaction multiple
now this is most important without this
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you will fail in terms of evaluations
before having much clarity let's look at
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some of the factors the first factor is
the time of the transaction see the most
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important of filter you should use while
looking at the emitter transaction is
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the timing of each transaction and that
transaction which should be really very
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recent one second the revenue of the
companies involved into into the
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transactions so you need to go through
the annual reports okay you know of the
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if the company to find out the latest
revenues
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the idea is to choose the companies that
are similar in the revenue and earning
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the third is you can go for the type of
business now this is one of the key
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factor to look at you need to look at
the business there are similar types it
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means you should look at the products
these services the target customers of
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the business and select those business
as comparables and finally choose the
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location now the last factor you should
look at the location of the comparable
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business the similar location would
justify because they then you would be
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able to look at the regional factors and
as well as you know you
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can say that plus you can see what
challenges those business in the same
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location they have faced let's see the
step three then you have to what you
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have to calculate the transaction
multiple so basically you need to
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calculate so there are three multiple
that you need to consider while looking
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for the similarities in the previous
transaction so this multiples may not
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give a very accurate picture of the
business but this multiples would be
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conclusive enough to make a decision now
the first and the foremost one is
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EV/EBITDA the most preferred one this
is one of the most common acquisition
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multiple financial analysts use the
reason investors finance professional
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uses multiple is because the EV that is
called the enterprise value and the EBITDA
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before interest tax depreciation and
amortization they both take debt into
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account the right range is close enough
to the right range of EV/EBITDA down range
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to 6 to 15 X the next multiple that you
can use is EV/Sales now this is
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also another multiple that is used by
the financial analyst an investor and
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this multiple is significant for certain
cases where EV/EBITDA does not work a
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start-up has negative you can say aEV/EBITDA and that's why you can say small
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business that's just got started
and analyst use EV/Sales multiple now
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this ranges between 123X the
next is EV/EBIT now this is
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another acquisition multiple that
investors and financial analysts use and
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it is important because it takes the
wear and tear of the business now for
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technology in consulting companies the
companies that are not so capital in
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self capital intensive EBIT and EBITDA
does not make much difference EBIT
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lesser than you can say the EBITDA down
and because depreciation amortization
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are adjusted in EBIT as a result EV/EBIT is usually higher than EV/EBITDA
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and this will range between you
can say 10 to 20 X now this is the list
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that I'm going to show you which
you know the acquisition details of the
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comparable companies like you know in
2017 this company before that was a
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target company crunching valuation draw
off of the transaction that is in
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millions is 2034 million the
buyer the acquirer was hands down
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limited and this was the three multiples
that were been used in the similar
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fashion crunch brush rush and and so on
and so forth various other companies
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that have been used and finally based on
this you will do an average of all of
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this and once you do the average you get
10.25 X 1.75 because these
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are the comparable companies that you're
using and based on based on that you
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have evaluated various multiples and you
get final data as average and median
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over here so you need to screen out the
right transaction and filter out the
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rest and how would you do that you would
look at the company's profile and would
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understand the transaction closely and
they will only choose the ones that fit
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the bills so then you would use the
right multiple and in in this case we
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use three and apply the acquisition
multiple and trying to value so the next
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you value the company by using right
acquisition multiple so the first you
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will look at the right range of the
acquisition multiple as they are highly
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high and low depending on that the
valuation would be done and then you
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would have a low and high range
valuation so you need to do do this for
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all the comp companies come comparable
transactions and then finally we will
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create a chart to find out the comment
rate and if the acquisition multiple of
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your company let's say it's EV/EBITDA than the average of 10.25X
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will apply to the target company
now there are some advantage of the
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transaction multiple valuation the
advantage is that first anybody can
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access the information so access is easy
you can say access is quite easy because
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it's public second since the valuation
is done on the basis of the range it is
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more realistic third since you are
looking at the different players you can
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understand the strategy of the same the
fourth it is it also helps you to
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understand the market better now
some disadvantages we'll quickly discuss
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the same the first is individual biases
you can say are valuing the
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target company would come into place and
no one can avoid it
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second even if the way even in various
factors are taken into consideration
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still there are many more factors that
are not considered considered actually
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in the valuation and even if the details
our deals are compared no deal can be
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exactly the same so there would be one
or more factor that would be different
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