Comparable Transaction – Definition

Cite this article as:"Comparable Transaction – Definition," in The Business Professor, updated September 14, 2019, last accessed May 27, 2020, https://thebusinessprofessor.com/lesson/comparable-transaction-definition/.

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Comparable Transaction Definition

The comparable transaction is a method used to value a company asset for a merger as well as acquisition. Those who intend to acquire the company together with their bankers are usually interested in comparable transactions.

They lookout for the most recent comparable transactions from valued companies, which also have the same business model. To derive a fair valuation, the comparable transaction data has to be more.

Note that this method of valuation helps to estimate the shareholders’ market-clearing price target. Another term for comparable business is the “guiding transaction method.”

A Little More on What is a Comparable Transaction

Those who are looking to value a company for sale apply the comparable transaction method. The method helps businesses to check out comparable transactions with the acquisition target, which is the same as the business model. It also includes the client’s base, similar to the firm being evaluated.

To arrive at the business’s value, you will have to use the company’s EBITDA similar to multiple achieved in the past. Also, used is the business’s comparable completed transactions within the sector.

In other words, to use comparable transactions as a method of valuing a company, you will have to look at the past transactions, in the industry. Other relevant metrics, like the price paid, are also factored in.

What does the selection process for comparable transactions entail?

Valuation asset approaches are selected to help arrive at a suitable method in given situations.  For this reason, one method is not enough in multiple situations. Therefore, the process of selecting comparable transactions should include the following:

  • A suitable base of premise and value determined by the valuation assignment’s terms and purpose.
  • The possible valuation approaches’ strength and weaknesses
  • Each method’s appropriateness based on the asset’s nature as well as approaches the participants use in the relevant market
  • Reliable information availability required to apply to the approaches

Key Steps used in Comparable Transaction Approaches

When you want to compare comparable transaction, there are various steps you need to follow:

Step one: Identify comparison units which participants use in the relevant market.

Step two: Identify comparable transactions of relevance and use them to compute those transactions’ key valuation metrics.

Step three: Make valuation metric adjustment where necessary so that the differences between the comparable and subject assets are reflected.

Step four: After adjustment, step four is to apply the valuation metric.

Step five: Reconcile the value’s indications, especially if the multiple valuation metrics were used.

Key Takeaways

  • The comparable transaction is a method used to value a company set for a merger as well as acquisition.
  • The comparable transaction helps businesses check out comparable transactions with the acquisition target, the same as the business model.
  • To arrive at the business’s value, you will have to use the company’s EBITDA similar to multiple achieved in the past.

Reference for “Comparable Transaction

https://en.wikipedia.org/wiki/Comparable_transactions

https://www.investopedia.com › Investing › Financial Analysis

https://corporatefinanceinstitute.com › Resources › Knowledge › Valuation

https://www.wallstreetmojo.com › Valuation › Valuation Multiples

www.streetofwalls.com/finance-training-courses/…/precedent-transaction-analysis/

obliviousfinance.com/corporate-finance/…based…/comparable-transaction-analysis/

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