How do you obtain a value for a company using the precedent transactions method?

The precedent transactions method involves analyzing past transactions involving similar companies to estimate the value of a target company. The correct approach in this context is to take the median multiple from these transactions and apply it to the financial metrics of the company you want to value.

Using the median multiple is essential because it mitigates the impact of outlier transactions that could skew the average, providing a more stable and realistic estimation of value. By applying this median multiple to the relevant financial metric of your target company (such as EBITDA, revenue, or net income), you derive a value that reflects the prevailing market conditions and buyer sentiments observed in the recent comparable transactions. This method ensures that the valuation closely aligns with what investors have actually paid for similar companies.

Other methods like averaging all transaction values might not adequately account for outliers, while using the lowest or highest multiples could either undervalue or overvalue the company in question, deviating significantly from market trends. This highlights the importance of the median as a more balanced metric in establishing a reliable company value using precedent transactions.