Precedent Transactions
A precedent transactions analysis values a firm using the multiples actually paid in past acquisitions of similar companies, rather than the multiples of firms trading on the open market. Because these are completed deals, the prices usually embed a control premium, the extra a buyer pays to obtain control and capture synergies, which Titman and Martin put at around 30 percent or more for strategic acquisitions. The result is that deal multiples typically run above trading multiples, so a precedent-transaction valuation answers a different question, what an acquirer would pay, not what a passive minority share is worth. The mirror-image adjustment is the liquidity discount of roughly 20 to 30 percent applied when a private, hard-to-sell firm is valued off public comparables.
Why it matters
There are two prices for a company. One is the price a single share changes hands at on the exchange. The other is the price someone pays to buy the whole thing and run it, which is higher because control is worth paying for. Precedent transactions read value from that second price, using multiples from real deals that already closed. They suit an acquisition or a fairness opinion, where the relevant benchmark is what buyers genuinely paid. Strategic buyers pay a control premium for synergies, while a private business carries a liquidity discount because its owner cannot sell out as easily as a listed shareholder can.
Formulas
Worked examples
Helix would value at an enterprise value of A$116.6 million on trading multiples. As a private firm, a 30 percent liquidity discount is appropriate. Apply it, then contrast with how a strategic buyer would think.
Apply the discount to the trading-multiple value. A$116.6 million times one minus 0.30 gives an enterprise value of about A$81.6 million, reflecting that a private stake cannot be sold as readily as listed shares. A strategic buyer assessing an outright acquisition would lean the other way, since deal comps already embed a control premium of perhaps 30 percent or more for the synergies it expects to realise. The same business therefore carries a lower number as an illiquid minority stake and a higher number as a controlling acquisition, which is exactly why the benchmark you choose has to match the question.
Common mistakes
- ✗Precedent transaction multiples equal trading multiples. Deal multiples usually exceed trading multiples because completed acquisitions embed a control premium that open-market prices do not.
- ✗A control premium reflects general optimism. It is the specific value of obtaining control and the synergies it unlocks, and its size depends on the bargaining strength of buyer and seller.
- ✗A liquidity discount and a control premium pull value the same way. They move in opposite directions. The control premium lifts the price an acquirer pays, while the liquidity discount lowers the value of a hard-to-sell private stake.
- ✗Precedent deals always give the most current valuation. Past transactions reflect the conditions of their own time, so deals struck in a hot market can overstate value once conditions cool.
Revision bullets
- •Precedent transactions use multiples paid in past acquisitions
- •Deal multiples usually embed a control premium of about 30 percent or more
- •They estimate what an acquirer would pay, not a minority share price
- •A liquidity discount of roughly 20 to 30 percent applies to private firms
- •Control premium lifts value, liquidity discount lowers it
- •Deal conditions are time-specific, so hot-market comps can overstate value
Quick check
Multiples from precedent transactions typically exceed open-market trading multiples because they include
A private firm valued at A$100 million on public-company multiples is assigned a 30 percent liquidity discount. Its adjusted value is
Connected topics
Sources
- Titman & Martin, Ch. 8Titman, S., & Martin, J. D. Valuation: The Art and Science of Corporate Investment Decisions. Pearson.Sets out control premiums for strategic acquisitions and liquidity discounts for privately held firms.
- Damodaran on relative valuationDamodaran, A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.Treats acquisition multiples, control premiums and discounts for lack of marketability.