16.2 Precedent Transactions and the Football Field

Precedent Transactions as a Relative Method

Precedent transactions analysis values the target off actual prices paid in completed deals for similar companies. Like trading comps, it is relative: you apply a deal multiple to the target's metric. Unlike trading comps, the prices are control prices. A public share price is a minority, marketable interest. An acquisition price is what a buyer paid for the whole firm (or a controlling stake), and it usually includes a control premium. CFI's exam-relevant point is simple: precedent multiples often sit above trading multiples for the same industry, and that gap is not automatically a modeling error.

The longer deal-process course — merger models, accretion and dilution, leveraged buyouts — is elective and not on the final. You will not be asked to build a full purchase-price allocation or a sources-and-uses. You will be expected to know that precedents exist, that they use the same multiple families (especially EV/EBITDA), that they embed control, and that they belong on the football field next to DCF and trading comps.

What a Precedent Multiple Measures

A deal multiple is:

Deal EV / target metric at announcement (or LTM at close)

Deal EV uses the offer value of equity plus net debt (and preferred and non-controlling interest), the same identity as Chapter 14. If the buyer paid $40.00 per share for 20 million diluted shares ($800 million of equity) and assumed $200 million of net debt, deal EV is $1,000 million. If LTM EBITDA was $70 million, the precedent is 14.3x EV/EBITDA.

That 14.3x is not comparable to an 11x trading multiple without comment. The buyer may have paid for:

• Control — the right to change strategy, capital structure, and management.
• Synergies — cost takeout or revenue upside that a portfolio investor does not receive.
• Competitive tension — an auction bids the price up.
• A different point in the cycle — a 2021 packaging deal is not a 2026 packaging deal.

Screening Deals (Fundamentals, Not the Elective Database)

Keep the same five filters as trading comps — industry, size, growth, margins, geography — and add:

• Time. Prefer recent deals. A 2016 multiple in a different rate world is a weak comparable.
• Deal type. Strategic corporate buyers often pay more than financial sponsors because they can underwrite synergies. If a stem flags a financial sponsor, do not assume the same premium as a strategic.
• Stake. A 15% toehold is not a control deal. Control precedents need a controlling stake.
• Metric quality. Normalize the target's EBITDA the same way you normalized trading comps. One-time items in a sale process inflate the denominator and understate the multiple.

You do not need a 40-deal sample for the exam. You need to show that you can read three honest deals, take a median, and apply it.

Worked Precedent Set for Northline

Three packaging deals (teaching set, not a published CFI table):

• Mean EV/EBITDA = (13.8 + 14.5 + 16.0) / 3 = 14.8x
• Median = 14.5x (FibreForm)

Apply the median to Northline's $150 million LTM EBITDA:

• Median: 14.5 × 150 = $2,175 million implied EV
• Mean: 14.8 × 150 = $2,220 million implied EV

Recall the trading-comp median of 12.0x, which implied $1,800 million. Precedents sit $375 million (about 21%) above that trading median on EV. That gap is the control-premium signature in this set, not a reason to throw out comps.

Equity bridge: 2,175 − 300 net debt = $1,875 million of equity, or $37.50 per diluted share versus the $24.00 market. Nobody should be shocked. The market is pricing a minority share. Precedents are pricing control.

Control Premium, Worked on BoxCraft

BoxCraft's unaffected trading EV/EBITDA was 11.0x. The deal multiple was 13.8x. The multiple premium = 13.8 / 11.0 − 1 = 25%.

On equity, keep net debt fixed at $200 million:

• Unaffected EV = 11.0 × 80 = $880 million → unaffected equity = 880 − 200 = $680 million
• Offer EV = $1,104 million → offer equity = 1,104 − 200 = $904 million
• Equity control premium = 904 / 680 − 1 = 33%

Two exam traps sit in that arithmetic:

1. Do not apply a 33% equity premium to EV, or a 25% EV-multiple premium to equity value. Premiums are not interchangeable across the stack because net debt does not take a premium.
2. Do not add a control premium on top of a precedent multiple. The deal price already includes it. Adding 25% to 14.5x is double-counting.

Trading comps do not include control. If a stem asks for minority value, lead with trading comps and DCF. If it asks what a strategic buyer might pay, lead with precedents — and still show the other two.

WrapCo at 16.0x is the high print because Northstar underwrote cost synergies. If those synergies are run-rate EBITDA the target does not yet have, part of the 16.0x is payment for a cost takeout a financial-sponsor bid cannot claim. On the final, do not force every deal to the high print just because one strategic paid it.

The Football Field

A football field (valuation football-field chart) places ranges from each method side by side so a reader can see overlap instead of a fake single number. CFI's three going-concern methods — DCF, trading comps, precedents — are the core bars. Current trading EV is drawn as a reference, not as a fourth method. Leveraged-buyout bars appear in some industry pictures; they are elective and do not belong on an FMVA-final field.

Northline's teaching field in enterprise value ($ millions):

Read the field; do not average it blindly. Overlap between DCF and trading comps around $1,450–$1,800 million is the minority / going-concern cluster. Precedents sit above that cluster, which is what you want if the deals included control. Current EV of $1,500 million sits at the low end of DCF and inside the trading-comp bar — Northline does not look wildly mispriced as a public minority stub. It does look cheap versus control values, which is the usual pattern, not a "buy the company tomorrow" signal by itself.

A naive average of the three mids — (1,700 + 1,575 + 2,175) / 3 = $1,817 million — blends a control price into a minority value. If the assignment is a share-price target for a public investor, do not let precedents dominate the midpoint. If the assignment is what a strategic might pay in an auction, do not let last week's close dominate.

From EV Ranges to a Per-Share Field

Subtract Northline's $300 million of net debt from every EV node, then divide by 50.0 million diluted shares:

The pitchbook version of this table is the football field: horizontal bars, methods on the y-axis, dollars on the x-axis, a vertical line at $24.00. Chapter 18 will care about how you draw it. This chapter cares that the numbers are consistent: same EV identity, same share count, same metric period, Summit not secretly back in the comps bar, and no control premium stacked onto a deal multiple that already has one.

If you used adjusted EBITDA of $165 million after the litigation add-back, every multiple-based bar would shift. Trading-comp mid becomes 10.5 × 165 = $1,733 million of EV ($28.65 per share after net debt). Precedent mid becomes 14.5 × 165 = $2,393 million ($41.85 per share). State the metric. A field that mixes unadjusted DCF cash flows with adjusted-EBITDA comps is two pictures taped together.

Scope, Electives, and Exam Habits

Comparable Valuation Fundamentals plus the valuation methods named in CFI's exam tips are in scope: you must be fluent in multiples, precedents, and comps, and you must be able to triangulate with DCF. Full comparable-company analysis as a standalone elective — large peer screens, statistical fits, 20-deal merger models — is not a final-exam requirement. If you see an LBO bar in a teaching picture, do not import it into the 50-question core exam.

Exam habits for this section:

• Label every bar EV or equity and do not mix them on one axis.
• State whether the multiple is LTM or forward.
• Use median over mean in small, skewed sets.
• Never add a control premium to a precedent multiple.
• Never apply a deal multiple to unadjusted EBITDA if the process flagged a one-time gain.
• Current price is a reference, not a valuation method.
• Elective deal mechanics can wait; the football field cannot.