COMPARABLE TRANSACTION MULTIPLE (CTM) METHOD

COMPARABLE TRANSACTION MULTIPLE (CTM) METHOD

The cost of a comparable transaction is one of the major factors in estimating the value of a company that is being considered as a merger and acquisition (M&A) target. The reasoning is the same as that of a prospective home buyer who checks out recent sales in a neighborhood. Comparable transactions are used in assessing a fair value for a corporate takeover target. The ideal comparable transaction is for a company in the same industry with a similar business model. The fair value of the takeover target is based on its recent earnings.

Comparable Transaction Multiple Method, also known as ‘Guideline Transaction Method’ involves valuing an asset based on transaction multiples derived from prices paid in transactions of an asset to be valued /market comparables (comparable transactions). The price paid in comparable transactions generally includes control premium, except where the transaction involves the acquisition of a noncontrolling/ minority stake. The following are the major steps in deriving a value using the CTM method:

Identify comparable transactions appropriate to the asset to be valued;

Select and calculate the transaction multiples from the identified comparable transaction;
Compare the asset to be valued with the market comparables and make necessary adjustments to the transaction multiple to account were differences, if any existed;
Apply the adjusted transaction multiple to the relevant parameter of the asset to be valued to arrive at the value of such asset.
If the valuation of the asset is derived by using transaction multiples based on different metrics or parameters, the valuer shall consider the reasonableness of the range of values and exercise judgment in determining a final value.

The transaction multiples are generally computed based on the following two inputs:

Price paid in the comparable transaction.
Financial metrics such as EBITDA, PAT, Sales, Book Value, etc of the market comparable.

Even multiples based on non-financial metrics such as EV per room for hotels, EV/Bed for hospitals) can be considered. A valuer shall preferably use multiple comparable transactions of the recent past rather than relying on a single transaction.

The following are some of the differences between the asset to be valued and comparable transaction that the valuer may consider while making adjustments to the transaction multiple: