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How They Transaction Multiples Used

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Last editedOct 20212 min read

A transaction multiples valuation is a means of valuing a company, and is often applied in the event of a merger and acquisition (M&A) being planned. When an M&A deal is being put together, a range of methods might be used to calculate a reliable company value, including discounted cash flow, net profits and the details of a balance sheet

How a transaction multiples valuation works 

The transaction multiples are used to calculate the value of a specific company by a method that analyses and compares the kind of price that has been paid in similar M&A deals. When collated this way, the details of these M&A deals form a peer group of transactions that are used to create a valuation range for the business in question. 

The calculation used for a transaction multiple 

The simplest way of explaining transaction multiples and the way in which they are calculated is to set out the calculation itself as the following:

A Value number divided by a Value Driver number

The Value number is the enterprise or equity value (EV) of the business, based on the information contained on the business balance sheet as it stood at the time of the M&A being announced. The Value Driver number is based on something that has driven the value of the business, and is usually a profit number. This Value Driver number must be adjusted in order to reflect the 12 months of business that took place prior to the M&A being announced. 

Choosing the metrics for a transaction multiples calculation 

When choosing the specific numbers to use in the calculation, it is important to compare like with like. For example, the equity value of a business doesn’t depend upon the capital structure of that business, and so should be compared with a similar Value Driver, such as earnings before interest and taxes (EBIT). 

Transaction multiples in practice

Choosing the right numbers to use in a transaction multiple calculation is vital. The enterprise value captures the net operating assets of a business, and can therefore be usefully divided by the EBIT over the last 12 months in order to deliver a picture of how efficiently the business has been operated.   

Once transaction multiples have been calculated, they can be compared with the figure delivered by previous transactions. Choosing the transactions to use as comparison points needs to be done carefully, and those deals should be selected on the basis of the following criteria:

  • The businesses used for comparison should be those that provide the same goods and/or services as those supplied by the business that is subject to an M&A

  • As well as working in a similar sector, the comparable businesses should have a revenue within the range of the business that is subject to an M&A

  • The more recent the comparable deals were, the more relevant the figures will be to an M&A taking place now 

  • The business should be located in the same part of the world as the business that is the subject of an M&A 

Interpreting transaction multiples

Once a range of transaction multiples has been reached, they need to be rounded up or down to a mean or median level in order to provide a useful comparison. As with any other aspect of the preparation for an M&A, choosing the deals to compare is a matter of interpretation, and all choices need to be supported with robust evidence.   

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