Precedent Transaction Analysis

Have you ever tried to sell your house?

The toughest part is settling on the right price to do so. One of the best ways to decide on the right price is to look at what other, similar houses in your locality were recently sold for. These real, completed transactions give you a practical benchmark.

In the world of company valuation, this is the logic behind Precedent Transaction Analysis (PTA).

What is Precedent Transaction Analysis?

PTA is a relative valuation method that estimates a company’s value based on how much similar companies were acquired for in the past. These historical transactions — mergers, acquisitions, or buyouts — act as reference points. It helps answer a practical question: “If someone was willing to pay this much for a similar company, what could mine be worth?”

Why is it Useful?

Unlike market-based comparisons that use current trading multiples, PTA relies on real acquisition values — which often include a premium paid by the buyer. This makes PTA especially relevant during takeovers, buyouts, or M&A deals where control is being transferred.

How It Works:

1. Identify Relevant Past Transactions: Find similar companies that were recently acquired — same sector, size, geography, and business model.
   

2. Extract Valuation Multiples: Look at key ratios from those deals, such as:

• EV/EBITDA (Enterprise Value to EBITDA)
  
• EV/Revenue
  
• Price-to-Earnings (P/E)
  

3. Apply Those Multiples: Apply the average multiple from past deals to the company you are valuing.
   

Example:

Suppose a logistics firm in India, similar in size to Blue Dart, was acquired for 12x EV/EBITDA. If your company has an EBITDA of ₹200 crore, then:

Estimated Value = ₹200 crore × 12

Estimated Value = ₹2,400 crore

This gives you a valuation based on real-world buying behaviour in the same sector.

Where It’s Most Useful:

• In merger and acquisition deals
  
• When estimating buyout value or control premium
  
• For private companies with limited market data
  

Limitations of PTA:

• Past deals may be outdated or done under unusual circumstances
  
• Can be hard to find truly comparable transactions
  
• Often relies on incomplete public information
  

PTA was widely used in large Indian M&A deals, such as when Walmart acquired Flipkart. Analysts valued Flipkart using similar e-commerce transactions globally, including deals involving companies like Jet.com and Alibaba's past fundraising rounds.

Precedent Transaction Analysis is like pricing your home based on recent neighbourhood sales. It gives you practical, real-world insight into what buyers are willing to pay. In the next chapter, we will explore Asset-Based Valuation Methods — where the company’s value is derived from the strength of what it owns, not what the market says.