Guideline Transaction Method
What is the guideline transaction (“GT”)?
Similar to the GPC method, the GT method is a market approach method whereby transaction multiples are derived from transaction prices of companies that were acquired or merged, who were engaged in the same or similar lines of business.
To execute this approach, we will select and analyze a basket of comparable companies that were acquired or merged, where the terms of the transactions may be obtained from public sources or data aggregators. When appropriate as a measure of value, we would assess the individual and range of revenue and EBITDA multiples of these transactions and apply an appropriate multiple to the subject company’s historical revenue and EBITDA.
An additional complexity here is that any GT may also reflect synergies that are specific to the buyer. This is almost always the case when a corporate purchaser is purchasing start-up enterprises. Similarly, transactions by financial purchasers (e.g. private equity funds) need to be analyzed for their structure to determine if the transaction value is actually indicative of the equity value of the firm purchased. The use of debt, equity and other complex financing tools may make GT for similar companies not comparable. Any GT must be adjusted to back-out any strategic premium or otherwise special consideration in the total transaction value before it is an applicable comparable.
How are the guideline transactions selected?
A significant limitation of the GT methods is that "true" comparables are unlikely to exist, particularly in valuing privately held, early-stage enterprises. Another limitation arises if the enterprise being valued has no earnings or has immaterial revenue because forecasts of financial statement amounts may then be highly speculative. However, we have assessed the company’s geography, industry, business operations, size, stage of development, prospects for growth, and risk.
When is it appropriate to use the GT method?
Methodologies used are a function of the purpose of the valuation, the scope, the hierarchy of signals available, and other facts and circumstances. As an example: the value of a 1,000 sq ft apartment in New York City is $1M, or $1,000 / sq ft. However, we rarely take this $1,000 / sq ft multiple and blindly apply it to other apartments to assess their value. A penthouse in Tribeca would require a higher multiple, whereas a pre-war building in the Bronx is much lower.
This is a simple example of a hard-asset. The complexities are exponential more when considering the transaction approach for companies. As you can imagine, when selecting multiples, it’s important to consider various factors (such as geography, industry, business operations, size, stage of development, prospects for growth, and other risks).