Case 41 / 183 Analyst
🔖 Save

Precedent Transactions

Valuation & DCF

The prompt

“Control premium, time period selection, strategic vs. financial buyer premiums”

📋 What you're given

As a financial analyst, you're asked in an interview: "Walk me through how you would build a precedent transactions analysis — how do you select the right deals, why do you need to think about a control premium, and how do strategic and financial buyers differ in what they're willing to pay?" Walk through how you'd answer that question, using a set of five recent M&A transactions in the target's industry to build an implied valuation range.

1. Task Overview

Task: build an implied Enterprise Value range for the target company by screening a set of precedent M&A transactions for relevance, computing their multiples, and applying the result to the target's own financials.

Step 1: Given Data for Precedent Transactions

The following five deals were announced in the target's industry over the past several years.

DealAcquirer TypeDate AnnouncedTransaction EV ($m)Target LTM EBITDA ($m)
Deal AStrategicJan 202462062
Deal BFinancialAug 202348060
Deal CStrategicMar 202391091
Deal DFinancialNov 202252575
Deal EStrategicMay 202176080

Step 2: Implied EV/EBITDA Multiple

Show EV/EBITDA Multiple Formula

EV/EBITDA Multiple = Transaction EV / Target LTM EBITDA

Using this formula, compute the implied multiple for each of the five deals.

Step 3: Screen for Relevance

Assume the valuation date is January 2025, and that deals older than three years are considered too stale to reflect current market conditions and are excluded from the set.

Identify which deal this screen removes, and which four remain.

Step 4: Average Multiple by Buyer Type

Show Average Multiple Formula

Average Multiple = Sum of Multiples in Group / Number of Deals in Group

Using the four remaining deals, compute the average multiple separately for the strategic buyers and for the financial buyers.

Step 5: Implied Enterprise Value Range

Show Implied EV Formula

Implied EV = Target LTM EBITDA x Selected Multiple

Assume:

  • Target LTM EBITDA = $150m

Using this formula, apply the low end and high end of the buyer-type averages to the target's own LTM EBITDA to build an implied valuation range.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

⚠️ Common mistakes

  • Averaging every deal in the set without screening for staleness or relevance, letting outdated deals quietly skew the multiple.
  • Forgetting that precedent transaction multiples already embed a control premium, then incorrectly layering an extra premium on top.
  • Treating strategic and financial buyer multiples as interchangeable, when the split itself is often the more useful data point.
  • Mismatching the multiple's numerator and denominator periods — e.g. using a forward EBITDA estimate against a multiple that was actually based on LTM EBITDA at announcement.
  • Confusing precedent transactions with comparable company analysis — trading comps use current public market prices, not historical deal prices.

🔁 Follow-up questions

➡️ Related cases

Case 35 Three Valuation Methods Case 40 Comparable Company Analysis
← Previous Case 40: Comparable Company Analysis Next Case 42: WACC with Leverage →

⭐ Rate this case

– 0 ratings

💬 Comments (0)

No comments yet — be the first to ask a question.

Part of a 183-case learning path. Create a free account to save progress & unlock follow-up answers.
Create free account