Posted in Finance, Accounting and Economics Terms, Total Reads: 188
Definition: Comparable Transaction
Comparable Transaction is used during the transaction of buyouts/ hostile takeover of the companies where the worth of the company is calculated, so that both the side of the transaction can have rough estimate of the amount to pay/to receive.
The receiving side will try to maximize the amount of transaction and paying side will try to minimize the amount of transaction. Comparable transactions consider the market value of the Public companies or companies of similar business model companies. But, more accurate amount of money is used like, multiple comparable techniques to find the worth of the company. It also helps to find the future growth potential of company.
Some of the methods are as follows
1) Multiple Method (EV/EBITDA ratio)
2) Discounted Cash flows
3) Company Analysis
Multiple Method involves the calculation of the ratios so that the company’s worth can be known by comparing with the peer companies (Companies having same Business Model). One of the drawbacks is non availability of Financial Information.
Discounted cash flow are calculated after performing perfect analysis of the External and internal information and then, calculating the future prospects of company. These cash flows are then discounted to calculate the worth of company. These two methods are widely followed by industry. Company analysis uses the technique of comparing company with the peer companies (having same B Model) . It calculates the average Debt to Equity ratio, average returns, future prospects of company etc, and then it takes the decision accordingly.