Precedent transactions analysis estimates value by reviewing prices and terms from completed deals involving businesses considered relevant.
Definition
The analysis reviews prior transactions and compares the businesses, deal dates, disclosed prices, and financial measures. It may consider whether a transaction involved a controlling interest, seller financing, earn-outs, rollover equity, or other terms that affect the headline price. For civil engineering firms, differences in services, size, client mix, backlog, geography, and leadership can limit how directly one deal applies to another. Available information may also be incomplete. Analysts may select different transactions or make different adjustments, so their conclusions can vary. Owners can use prior deals as context for a valuation discussion, while understanding the circumstances behind the reported figures. Precedent transactions are not the same as comparable public company analysis, and prior deal prices do not establish what a buyer will pay now. The AICPA provides resources on valuation services.
How owners use it
- Review each transaction’s structure, timing, and disclosed financial basis before treating it as a comparison.
- Consider whether a prior deal included control, contingent payments, or seller financing that changes the headline amount.
- If a transaction price was $10,000,000 and the comparable earnings measure was $2,000,000, then $10,000,000 ÷ $2,000,000 = 5 times earnings.
- Use transaction evidence as one input alongside the firm’s financial performance, risks, and future prospects.
