Transaction multiples valuation | Definition | Steps to Calculate

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