Trading Comps vs Precedent Transactions: Key Differences
Understand when to use trading comps vs precedent transactions in valuation. Learn the methodology, pros/cons, and interview applications.
Trading comps and precedent transactions are the two main relative valuation methodologies. Understanding when to use each—and their respective strengths and weaknesses—is crucial for finance interviews and real-world valuation.
Quick Overview
Note
Trading Comps (Public Company Comparables): Value a company based on how similar PUBLIC companies are currently trading in the market.
Precedent Transactions: Value a company based on what acquirers have PAID for similar companies in past M&A deals.
Key Differences
Trading Comps vs Precedent Transactions
| Aspect | Trading Comps | Precedent Transactions |
|---|---|---|
| Data Source | Current market prices | Historical M&A deals |
| Control Premium | Not included | Included (~20-40%) |
| Data Freshness | Real-time, current | Historical (may be stale) |
| Market Conditions | Reflects TODAY's market | Reflects PAST market |
| Synergies | Not priced in | Often priced in |
| Deal Context | Minority stakes | Full acquisitions |
| Typical Result | Lower valuation | Higher valuation |
Trading Comps: Deep Dive
What It Is
Comparable Company Analysis values a company by applying multiples from similar publicly traded companies. If Competitor A trades at 12x EBITDA and Competitor B at 11x, you might value your company at ~11.5x.
Methodology
- Select comparable companies (same industry, similar size, growth, margins)
- Gather financial data (market cap, debt, cash, EBITDA, revenue, etc.)
- Calculate multiples (EV/EBITDA, EV/Revenue, P/E)
- Analyze the range (median, mean, quartiles)
- Apply to target (multiply target's metrics by selected multiple)
Trading Comps Pros & Cons
| Term | Definition |
|---|---|
| Pro: Current Market View | Reflects today's market sentiment and conditions |
| Pro: Readily Available | Public data, easy to gather |
| Pro: Objective | Based on observable market prices |
| Con: No Control Premium | Doesn't reflect value of controlling a company |
| Con: Market Volatility | Values can swing with market sentiment |
| Con: Finding True Comps | Difficult to find truly comparable companies |
Precedent Transactions: Deep Dive
What It Is
Precedent Transaction Analysis values a company based on multiples paid in actual M&A transactions for similar companies. If similar companies were acquired at 14-16x EBITDA, that range becomes your benchmark.
Methodology
- Identify relevant transactions (same industry, similar size, recent enough)
- Gather deal data (purchase price, target financials at time of deal)
- Calculate transaction multiples
- Adjust for outliers (strategic premiums, distressed sales)
- Apply to target
Precedent Transactions Pros & Cons
| Term | Definition |
|---|---|
| Pro: Includes Control Premium | Reflects what buyers actually pay for control |
| Pro: Relevant for M&A | Most directly applicable to acquisition scenarios |
| Pro: Reflects Synergies | Buyers often pay for expected synergies |
| Con: Historical Data | Market conditions may have changed |
| Con: Limited Data | May not find enough comparable deals |
| Con: Deal-Specific Factors | Each deal has unique circumstances |
The Control Premium
Critical Concept
Precedent transactions typically include a control premium of 20-40%+ over the trading price. This premium reflects:
- The value of controlling the company's strategy and operations
- Ability to realize synergies
- Power to make major decisions (M&A, capital allocation, management)
This is why precedent transactions usually give HIGHER valuations than trading comps.
When to Use Each
Use Case Guide
| Term | Definition | Note |
|---|---|---|
| IPO Valuation | Trading Comps primary | No control premium needed |
| M&A - Sell Side | Both, emphasize Precedents | Justify higher price |
| M&A - Buy Side | Both, emphasize Trading Comps | Argue for lower price |
| LBO | Both, but focus on entry multiple vs comps | Need to pay control premium |
| Equity Research | Trading Comps | Minority stake perspective |
| Fairness Opinion | Both methodologies required | Must triangulate |
Interview Questions
Practical Tips
Pro Tip
- Use multiple methodologies: No single method is perfect. Triangulate DCF, trading comps, and precedent transactions.
- Adjust for control premium: If using trading comps for M&A, add 20-30% for control.
- Consider market timing: Precedent transactions from 2021 may not be relevant in a 2024 market.
- Look at the range: Don't just use the median. Understand why companies trade at different points in the range.
- Question the comparability: "Comparable" is relative. Be ready to defend your comp selection.
Key Takeaways
Key Takeaway
- Trading comps = current market values for minority stakes
- Precedent transactions = historical deal values including control premiums
- Precedents are usually higher due to control premium + synergies
- Use both and triangulate for robust valuations
- Context matters: sell-side vs buy-side changes which you emphasize