Comparable transactions

Comparable transactions is one of the conventional methods to value a company for sale. The main approach of the method is to look at similar or comparable transactions where the acquisition target has a similar business model and similar client base to the company being evaluated. This approach is fundamentally different from that of DCF valuation method, which calculates intrinsic value.

Example

For instance, Providence Equity Partners acquired Virtual Radiologic Corporation, which is an online clinic that provides radiologist analysis through a virtual network. It was sold for a price of $282 million and an enterprise Value of $242 million. To evaluate a similar unsold company, we would look at what are called the transaction multiples. One popular transaction multiple is EV/EBITDA. For Virtual Radiologic Corporation, the EBITDA at the time of the transaction was $20 million, giving an EBITDA multiple of 12.1x. A similar unsold company, which has EBITDA at $10 Million could expect to be sold for $120 million. In some market segments, the companies do not have high EBITDA, and sometimes a multiple based on revenues (EV/sales) is used instead. To get a more accurate valuation, one should look at the multiples of more than one similar deals that are relatively recent since multiples do change from year to year.

References

• The Art of Valuations, by Carole Belmar, CPA
• Valuations based on comparable transactions by Research Ratings
• Comparable Transaction Analysis in the Glossary of mergers-acquisitions.org