Comparable Transaction

  

When one company wants to acquire another, where do they even start to figure out the right price to pay? Take a company with a similar client base, similar products, and similar business model. As the purchasing company, comparable transactions can be a way to value the company for sale…especially important when that target company isn’t publicly traded.

Example:

A Brazilian wax company, Slippery When Bon Jovi, wants to expand by buying another Brazilian wax company, Snail. Slippery When Bon Jovi specializes in older women wanting to, um...feel younger. But Snail has a client base comprising mostly Khardashian fans.

In trying to get a fair price, both companies will first look at other transactions that happened in the marketplace. (Investment bankers get paid to know this stuff.) They’ll look at what price those transactions paid per client. Per dollar of revenue? Per dollar of profit?

Then they’ll put on blindfolds, throw a dart at a dartboard, and hope that they get to some reasonable number that lets the transaction happen.

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