What are the common pitfalls and challenges of using precedent transactions database?

1 Data availability

One of the main challenges of using precedent transactions database is finding enough data on comparable transactions. Depending on the industry, market, and time period, there may not be many relevant deals to choose from, or the data may be incomplete, outdated, or unreliable. You may also face confidentiality issues, as some transactions may not be publicly disclosed or reported. Therefore, you should always check the source and credibility of the data, and use multiple sources if possible. You should also adjust the data for any significant changes in market conditions, industry trends, or company performance.

2 Selection criteria

Another challenge of using precedent transactions database is selecting the most appropriate transactions to compare with your target company or asset. You need to define clear and consistent criteria for identifying comparable transactions, such as size, industry, geography, business model, growth rate, profitability, and synergies. However, finding exact matches may be difficult or impossible, as each transaction is unique and influenced by various factors. Therefore, you should also use some qualitative judgment and analysis to assess the similarities and differences between the transactions, and apply appropriate discounts or premiums to reflect them.

3 Valuation multiples

A common pitfall of using precedent transactions database is relying too much on valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), or enterprise value-to-EBITDA (EV/EBITDA). Valuation multiples are simple and convenient ways to compare the relative value of different transactions, but they also have some limitations and drawbacks. For example, valuation multiples may not capture the full value of intangible assets, such as brand, reputation, or intellectual property. They may also be affected by accounting policies, capital structure, or non-recurring items. Therefore, you should always use a range of valuation multiples, and complement them with other valuation methods, such as discounted cash flow (DCF) or net asset value (NAV).

5 Synergy effects

A final challenge of using precedent transactions database is estimating and incorporating the synergy effects of the transactions. Synergy effects refer to the additional value or benefits that result from combining two or more companies or assets, such as cost savings, revenue growth, or operational efficiency. Synergy effects can increase the value of the transactions, and hence the valuation multiples, but they can also be difficult to measure and realize. Therefore, you should always be careful and realistic when estimating and applying the synergy effects, and avoid double-counting or overestimating them.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?