Comparable transactions
Encyclopedia
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.
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.
Example
For instance, Providence Equity PartnersProvidence Equity Partners
Providence Equity Partners is a global private equity investment firm focused on media, entertainment, communications and information investments...
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
Enterprise value
Enterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...
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
EV/EBITDA
EV/EBITDA is a valuation multiple used in finance and investment to measure the value of a company. This important multiple is often used in conjunction with, or as an alternative to, the P/E ratio to determine the fair market value of a company.An advantage of this multiple is that it is capital...
. 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
EV/Sales
Enterprise Value/Sales is a financial ratio that compares the total value of the company to its sales. Generally, the lower the ratio, the cheaper the company is. Some investment professionals believe—as enterprise value and sales both consider debt and equity holders—Enterprise Value/Sales is...
) 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.