Step V Determine Valuation

In precedent transactions, the multiples of the selected comparable acquisitions universe are used to derive an implied valuation range for the target. While standards vary by sector, the key multiples driving valuation in precedent transactions tend to be enterprise value-to-LTM EBITDA and equity value-to-net income (or offer price per share-to-LTM diluted EPS, if public). Therefore, the banker typically uses the means and medians of these multiples from the universe to establish a preliminary valuation range for the target, with the highs and lows also serving as reference points.

As noted earlier, valuation requires a significant amount of art in addition to science. Therefore, while the mean and median multiples provide meaningful valuation guideposts, often the banker focuses on as few as two or three of the best transactions (as identified in Step IV) to establish valuation.

For example, if the banker calculates a mean 7.0 x EV/LTM EBITDA multiple for the comparable acquisitions universe, but the most relevant transactions were consummated in the 7.5x to 8.0x area, a 7.0x to 8.0x range might be more appropriate. This would place greater emphasis on the best transactions. The chosen multiple range would then be applied to the target's LTM financial statistics to derive an implied valuation range for the target, using the methodology described in Chapter 1 (see Exhibits 1.35, 1.36, and 1.37).

As with other valuation methodologies, once a valuation range for the target has been established, it is necessary to analyze the output and test conclusions. A common red flag for precedent transactions is when the implied valuation range is significantly lower than the range derived using comparable companies. In this instance, the banker should revisit the assumptions underlying the selection of both the universes of comparable acquisitions and comparable companies, as well as the calculations behind the multiples. However, it is important to note that this may not always represent a flawed analysis. If a particular sector is "in play" or benefiting from a cyclical high, for example, the implied valuation range from comparable companies might be higher than that from precedent transactions. The banker should also examine the results in isolation, using best judgment as well as guidance from a senior colleague to determine whether the results make sense.

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