Guideline Transactions and Prior Transactions Methods
What concerns might you have with the guideline transaction method in this case?
Right.
A private company valuation is prepared on a going-concern basis, without regard to a specific transaction or any possible synergies that could be achieved. The guideline transaction pricing data may reflect synergies of the transactions, which would indicate the pricing data may not be relevant.
In addition to synergies, any __contingent consideration__ must be examined. This is future payments to the seller that may happen if certain thresholds or milestones are met. Non-cash consideration like stock should be considered as well, and both of these obviously add some risk and uncertainty.
Why do you think you should not include the guideline transaction method in a valuation of a controlling interest for this private company?
Right.
The age and limited amount of transaction data indicates that the guideline transaction method may not be usable for this valuation.
No.
The guideline transaction method can be relevant even if the subject company is not currently considering a transaction.
Why do you think you should not include the guideline transaction method in a valuation at the end of the second year?
Right.
In this case, there are a sufficient number of transactions to use the guideline transaction method. However, the equity market pricing indicates that the transaction data may no longer be relevant due to the difference in risk and anticipated growth.
No.
It's actually preferable to have recent transactions for the guideline transaction method.
No.
The number of transactions identified in this case—12—is generally a sufficient number of transactions for the guideline transaction method.
How should you incorporate these prior transactions in the valuation, if at all?
No.
Prior transactions must be available, timely, and at arm's length to be relevant for a prior transaction method.
Right.
The transactions occurred between family members, so the transactions were not arm's length transactions. Prior transactions must be available, timely, and arm's length to be relevant for a prior transaction method. In reality, it's very uncommon for there to be enough relevant prior transactions in private company stock to justify using the prior transaction method.
In summary:
[[summary]]
No.
Guideline transactions are based on controlling interest transactions, so the pricing data reflects the benefits of control.
No.
The guideline transactions reflect data within a past year and at a similar timeframe to the private company valuation, which is a good timeframe for this method.
No.
The guideline transaction method is appropriate for controlling interest valuations.
No.
Actual transactions in the subject company stock would not be included in the guideline transaction method, which relies on market transactions of other companies' equity.
House buyers and sellers often review recent home purchases to estimate a price for a house on the market. The data guides them towards a conclusion of value for the property being bought or sold. Analysts similarly review recent corporate transactions to value a private company. In a similar way, the transactions provide guidance towards a conclusion of value for the private company.
There are 10 guideline transactions for the pipe manufacturing industry that occurred in one year. Most of the transactions were between firms in the industry, as it had been going through a consolidation phase.
The transactions are included in a valuation for a controlling interest in a private company in the same industry at a similar timeframe.
One transaction occurred for the water technology industry, 18 months prior to the valuation date for a private company in the same industry.
The engineering industry had 12 relevant transactions occur within one year. The next year, the equity markets declined precipitously due to significant disclosures of losses in the financial industry and a dramatic slowdown in the housing industry.
Prior transactions in the private company stock are also pricing evidence. A prior transaction method can sometimes be included in valuations. Consider a private firm that had three transactions of shares of stock in the prior year. All of the transactions occurred between family members of the controlling interest shareholder.
The guideline transactions may not reflect the benefits of control
The guideline transactions may reflect market pricing data that is not current
The guideline transactions may reflect synergies from combining two similar firms in the industry
The private company is not currently considering a transaction
There is a limited amount of transaction data, and the date of the transaction is too old
The guideline transaction method should only be used for valuations on a minority interest basis
There are not enough transactions
The transactions occurred too close to the valuation date
The equity market pricing after the changes in the economy indicates a change in the risk and growth opportunities in the industry
Do not include them
Include them in the prior transaction method
Include them in the guideline transactions method
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