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  • Writer's pictureShivani Deshmukh

2022 Beginner's Comprehensive Guide to Precedent Transaction Analysis

In the world of corporate finance, precedent transactions are used to compare similar companies, deals, and products. They can be used to compare similar industries and buyers as well.

The Precedent Transaction Analysis is a process that helps to identify the best practices for your company. It's an approach to the business strategy that considers what has worked and what hasn’t worked in similar businesses so that you can avoid repeating mistakes.

It's especially useful when you're trying to find ways to grow your business and improve its profitability.

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What is the Precedent Transaction Analysis?

Precedent transaction analysis is a valuation method that uses the financial information of similar transactions to determine the fair market value of a business or an asset. This method can be used both in litigation and in valuing businesses.

It can help value an acquisition or a company. This is because it looks at the deals that have already been done and pull out some key numbers that you can use as a guideline for your deal.

This technique is used to analyze the past performance of a particular asset or group of assets. It can be used to estimate future returns based on past returns and other factors.

Precedent transaction analysis uses a company's historical financial information to determine its ability to generate cash flow and determine the value of its assets when they are sold. This can be done by comparing the current market price of an asset to that of similar companies, which have traded in the same marketplace over time.

Why Should you Conduct a Precedent Transaction Analysis?

Precedent transaction analysis is valuable because it can help you better understand how the market values a company or deal. If your business is considering acquiring another business, conducting a precedent transaction analysis helps you to determine whether the price offered is fair based on other recent transactions.

If you want to sell your company, conducting a precedent transaction analysis will help you determine what similar businesses have sold for and how much money the owners made from selling their companies. Comparing those figures with what you expect yours will be worth, will help you decide whether it's time to take that leap!

The Formula used for Precedent Transaction Analysis

How do you Conduct a Precedent Transaction Analysis?

A precedent transaction analysis is the process of evaluating a transaction to determine whether it is appropriate for future transactions. The process involves analyzing past transactions to identify historical patterns. These patterns can be used as a guideline for future decision-making.

You conduct a precedent transaction analysis by looking at the company's financials, historical performance and growth, and its industry.

The following are some of the key steps for conducting a precedent transaction analysis:

  • The transactions that you choose to analyze should have similar characteristics and be from the same industry or geographic region as your business. The most important thing is to make sure that the transactions are recent enough that their outcomes are still relevant to your current situation.

Identify the decision-making criteria upon which the new transaction will be based. This includes all relevant factors, such as risk profile, cost, strategic importance, and timing.

  • After you have identified the right transactions, you must conduct a thorough analysis of them. You will want to look at how each transaction was conducted and what happened in each case, as well as how each transaction was financed or paid for and what it cost in terms of money, time, effort, and risk.

Determine whether there is any overlap between the old and new transactions. If so, consider how the new transaction will differ from its predecessor from regulatory and/or operational perspectives.

  • If necessary, you may also want to compare these results with those of other companies or industries to get an idea of how successful your business would be if it were run using these specific tactics.

Identify any similarities between the old and new transactions that indicate potential synergies or issues that could negatively affect either party's interests if they were to merge, split or otherwise expand into each other's markets or functions (i.e., regulatory concerns).

Examples of precedent transactions

  • Merger and acquisition transactions

  • Capital markets transactions

  • Leveraged buyouts (LBOs)

  • public offerings, private placements, and spin-offs

  • Divestitures, liquidations, and bankruptcies

Applications of precedent transactions

While precedent transactions can be used for many purposes:

  • Mergers and acquisitions (M&A)

  • Business valuation

  • Investment analysis

  • Risk analysis

  • To predict how a given market will perform on a particular date.

  • To determine how much demand there will be for a certain product at a certain time.

  • Precedent transactions can also be used to help evaluate new product development projects, which can lead to better ideas for new products and services.

Advantages of Precedent Transaction Analysis

Below are some of the advantages of using precedent transactions when evaluating either companies or deals:

  • Comparability: Precedent Transactions allow for comparisons between different situations (for example: comparing two companies in similar industries) that wouldn't otherwise be possible without them because they provide a common denominator for all parties involved during valuation discussions such as earnings multiples based on historical earnings numbers.

  • Standardized Analysis Framework: Precedent Transactions give analysts something concrete upon which they can base their recommendations; this will help build confidence among clients who may otherwise not be familiar with financial terminology such as "earnings multiples."

  • To identify if a specific policy change would have a positive or negative impact on the company's overall financial performance.

  • To determine if an existing policy is performing as expected, or if any areas need improvement.

  • To provide information about how other companies have implemented similar policies or procedures as your organization so that you can make informed decisions regarding your own organization's policies and procedures.

  • It gives you an idea about what is happening in the market, which can help in predicting future trends and developments in the market.

  • It gives you insight into customer behavior and what they like or not, etc., which helps in developing your product or service accordingly.

  • Prior transaction analysis can help you understand how to manage your risks, which is important for any business.

  • It can help you understand the context of a prior transaction and what caused it to happen. This helps you understand how different situations will play out similarly in the future.

Disadvantages of Precedent Transaction Analysis

  • Not all transactions are alike.

  • Precedent transactions may not be relevant to the current transaction.

  • Precedent transactions may be outdated and/or incomplete.

  • Precedent transactions may not be credible, i.e., it is difficult for users to verify their assumptions about what happened in a particular deal or transaction (e.g., did the company have access to capital at the time of signing?).

  • Precedent transactions are often complex and involve multiple parties, it can be challenging to determine which transactions are relevant in determining the appropriate decision.


The precedent transaction analysis is a useful tool for analyzing a contract. It allows the user to see how a contract has been handled in the past and can help them determine whether they would want to use that method again. It provides a useful framework for understanding how precedent transactions affect a company's stock price. The analysis shows how the value of a company's stock can increase or decrease based on previous transactions. It also demonstrates how companies can use their past performance to predict future performance and adjust their stock price accordingly. This can help them increase profits, reduce costs, and improve quality.

Key Takeaways

Performing a precedent transaction analysis can help investment bankers and private equity firms determine how much a firm is worth.
Precedent transaction analysis involves the comparison of one or more events from previous transactions to predict future events.
An organization should look to precedent transactions when estimating the value of an asset and how much negotiation power they have.
Previous deals give you a level of negotiating power and they provide a reference point in terms of valuing assets, especially if similar transactions are being done in the same market.

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