Transaction Multiple Valuation (M&A)

What is Transaction Multiples (M&A)?

Transaction multiples or Acquisition Multiple is a method where we look at the past Merger & Acquisition (M&A) transactions and value a comparable company using precedents.

It is based on the premise that the value of the company can be estimated by analyzing the price paid by the acquirer company’s incomparable acquisitions. This valuation method is usually used by financial analysts in corporate development, private equity firms, and investment banking segments.

Also, have a look at Comparable Company Analysis

Transaction Multiple Calculation

The obvious question is how financial analysts calculate this multiple. This has two answers. One is short and another is long.

In short, it’s all dependent on how they identify similar businesses and look at their recent M&A deals. And depending on that, they value the target company.

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The long answer is a little more detailed. Let’s elaborate it step by step.

Step 1 – Identify the Transaction

We can identify the transaction using the following sources –

Company Websites – Go through the comparable company’s press releases and recent activities section. Go through the other general strategy sections to see the transactions which the company discusses most.
Industry Websites – You can also refer to industry websites like thedeal.com which contains almost all the deals from various sectors.
Bloomberg CACS – If you have access to the Bloomberg terminal, then you can also check out the CACS section of the comparable companies.

Step 2 – Identify the right multiples

For having more clarity on the same, look at the following factors –

Time of the transaction: The most important filter you should use while looking at M&A transactions is the timing of each transaction. The transactions should be very recent.
The revenue of the companies involved in the transactions: You need to go through the annual report of the companies to find out the latest revenues. The idea is to choose companies that are similar in revenues/earnings.
Type of business: This is one of the key factors to look at. You need to look at businesses that are of similar types. It means you should look at the products, services, target customers of the businesses and select those businesses as comparables.
Finally, the location: The last factor you should look at is the location of the comparables businesses. A similar location would justify because then you would be able to look at regional factors as well plus you can see what challenges those businesses in the same location faced.

Step 3 – Calculate the Transaction Multiple Valuation

There are three multiples that you need to consider while looking for similarities in previous transactions. These multiples may not give a very accurate picture of the business, but these multiples will be conclusive enough to make a decision.

EV/EBITDA: This is one of the most common acquisition multiples financial analysts use. The reason investor/finance professional uses this multiple is that EV (Enterprise Value) and EBITDA (Earnings before interest, taxes, depreciation, and amortization) both take debt into account. The right range of EV/EBITDA is 6X to 15X.
EV/Sales: This is also another common multiple that is used by the financial analysts/investors. This multiple is significant for certain cases where EV/EBITDA doesn’t work. A start-up has a negative EV/EBITDA. And that’s why small businesses that just got started, analysts use EV/Sales multiple. The usual range of EV/Sales is 1X to 3X.
EV/EBIT: This is another acquisition multiple that investors and financial analysts use. It is important because it takes the wear and tear of the company into account. For technology and consulting companies (the companies that are not so capital intensive), EBIT and EBITDA don’t make much difference. EBIT is lesser than EBITDA because depreciation and amortization are adjusted in EBIT. As a result, EV/EBIT is usually higher than EV/EBITDA. The usual range of EV/EBIT is 10X to 20X.

Example

Below is the acquisition details of the comparable acquisitions.

Date	Target	Value of Transaction (in $ million)	Buyers	EV/EBITDA	EV/Sales	EV/EBIT
05/11/2017	Crush Inc.	2034	Hands down Ltd.	7.5X	1.5X	12X
08/09/2017	Brush Co.	1098	Doctor Who Inc.	10X	2.5X	15X
03/06/2017	Rush Inc.	569	Good Inc.	8.5X	1.9X	17X
10/04/2017	Hush Ltd.	908	Beats & Pieces Ltd.	15X	1.1X	11X
Average				10.25X	1.75X	13.75X
Median				9.25X	1.7X	13.5X

You need to screen the right transactions and filter out the rest. How would you do that? You would look at the company profiles and would understand the transactions closely and they will only choose the ones that fit the bill.

Then, you would use the right multiples (in this case we used three) and apply the acquisition multiples to the target company you’re trying to value.

Next, you would value the company by using the right acquisition multiples.

First, you would look at the range of the acquisition multiples – are they high or low.
And depending on that the valuation would be done. And we would have a low range and a high range valuation.
You need to do this for all comparable transactions. And then finally, we will create a chart to find out the common thread.
If the right acquisition multiple for your company is EV/EBITDA, then the average of 10.25x will apply to the target company.

Advantages

Anybody can access the information available; because it’s public.
Since the valuation is done on the basis of range, it is much more realistic.
Since you’re looking at different players, you can understand the strategy of them.
It also helps you understand the market better.

Disadvantages

Individual biases while valuing the target company would come into place; no-one can avoid it.
Even if various factors are taken into consideration, still there are many more factors that are not considered.
Even if the deals are compared, no deal can be the same. There would be one or more factors that would be different.