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 |
A company was acquired at 15x EBITDA last year. Similar public companies trade at 10x today. What is the MOST likely explanation for the gap?
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 |
Trading comps and precedent transactions appear in nearly every IB interview. Practice both methodologies.
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 |
You're advising a client selling their business in a competitive auction. Which valuation methodology would you emphasize to justify a higher price?
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
Which of the following is NOT a challenge when using precedent transaction analysis?
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
Continue Your Interview Prep
Master these related valuation topics:
- EV/EBITDA Multiple Explained — The most common valuation multiple
- Walk Me Through a DCF — Intrinsic valuation methodology
- Enterprise Value vs Equity Value — The critical bridge
- Accretion/Dilution Explained — M&A analysis
- IB Interview Questions Guide — Complete technical prep