Comparable transactions, in the context of
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
(M&A), 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. The value of a business is then arrived at using a similar multiple of the company's
EBITDA
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandat ...
as demonstrated by multiples of EBITDA achieved in past, completed transactions of comparable businesses in the sector.
See
valuation using multiples
In economics, valuation using multiples, or "relative valuation", is a process that consists of:
* identifying comparable assets (the peer group) and obtaining market values for these assets.
* converting these market values into standardized val ...
more generally. This approach is fundamentally different from that of
DCF valuation method, which calculates
intrinsic value.
Example
In 2010,
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 million and an
enterprise Value
Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecure ...
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
Enterprise value/ EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used to determine the fair market value of a company. By contrast to the more widely available P/E ratio (price-earnings ratio) it incl ...
. 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
{{DEFAULTSORT:Comparable Transactions
Mergers and acquisitions