How to Value a Private Company: M&A Comps

We know that understanding a private company’s value is crucial for dealmakers, but the process can be challenging because of limited data.

Recently, we covered how investors can use public comps and VC & growth equity comps. Now we’re focusing on how past M&A deals — specifically, acquisitions — can help dealmakers evaluate their private-market targets.

What are M&A comps and why are they important?

In the simplest sense, M&A comps are acquisitions comparable to the one you’re evaluating, in terms of industry, products and services, end markets, business model, size, and growth.

M&A comps are more commonly known as “precedent transactions.” Many unique factors go into M&A deals, so they tend to be bespoke. However, M&A comps are called precedent transactions for a reason: they set the precedent for future deals.
Let’s go back to fundamentals. A transaction “clears” when the buyer’s bid is greater than or equal to the seller’s ask.

M&A comps are the prices that have cleared in private markets. Private markets are much smaller in scale than public markets, with between 30-50k transactions per year globally, or around 200 per day. Compare that to Microsoft, which often sees over 20M transactions per day on its own. That means every transaction counts so much more in private markets.

Precedent transactions are by far the most widely used form of valuing a company. They set fixed benchmarks for valuing M&A deals, whereas factors in your specific deal like growth, margins, barriers to entry, and IP could change what you actually pay.

What are the challenges of using M&A comps?

M&A comps data is extremely hard to find. Transaction values for less than 15% of deals are announced publicly. When values are announced, they are typically for larger deals.

Take-privates tend to have the most information since the companies who were acquired were previously public. We discuss the public comps more in depth here.

Different jurisdictions also have different reporting requirements. More European deals announce values compared to US deals, for example.

For most deals, the details are in the heads of the dealmakers, in highly confidential transactions documents, or captured in firm-specific CRMs. Typically, the only way to get info is behind closed doors:

Bankers: Most investors will try to find the banker who advised the buyer or seller and get directional estimates from them. They will often give you a sense to show that they’re knowledgeable of the deal. Even if they didn’t advise the deal, they may have heard rumors or may know information from another buyer/investor involved in the deal.
Other Investors: The other channel of information is, of course, other investors. Most peers won’t talk to each other because of competitive concerns, so this information can be hard to come by. However, sometimes you can navigate through rumors to find other buyers who bid on the deal, or at least knew the seller’s ask.

Even if you manage to get to a deal value, you are unlikely to find revenue or EBITDA, so you only have half of what you need. Less than 10% of deals announce deal values, and under 3% announce EBITDA.

Sure, you can triangulate this by relying on the rumor mill or insights from those familiar with the deal, as you did for valuations. But your best bet is going to be your internal team, especially if you have a BD team. If you don’t, this could be one really good reason to form one. BD teams talk to a lot of sellers and, if their conversation notes are stored in your CRM, you likely have some sense of scale and the seller’s ask.

Because M&A comps are so hard to get, public perception is very skewed toward the ones that are announced. The public will use them as the benchmark, and private market investors will pick and choose what information they reveal.

Everyone tends to use outliers when citing precedents. Acquirers will start with the medians as their valuation justification. If they’re getting really excited about a deal, then they’ll use the high end outliers to justify to their IC/board why they can pay more.

Sellers hang their hat on the median as their min and look at the outliers for what they want. If they are getting offers below, they tend to be demotivated to sell. Bankers, of course, also rely on medians and top outliers to pitch their sell-side clients the potential big reward that comes with a competitive deal.

Let’s say you manage to get the financial info you need on precedent transactions. The battle isn’t over yet. First, it’s actually really difficult to know which transactions to use for comparison. Roll-ups aside, there are very few M&A deals. To find the right comps, most people “hunt and peck” for deals they already know about in Pitchbook.

Then, once you find similar deals, you have to make sure that your target has a similar product or service offering, with a similar business model, and sells to similar customers. You also have to account for size and growth, as well as cap table considerations.

How can I use M&A comps?

M&A is the most obvious use case for precedent transactions. PE firms want them, strategic acquirers want them, and IBs also want them.

But what about the less obvious use cases?

For VCs

VCs tend to use precedent transactions when estimating what an investment could sell for, typically as a downside case if the company doesn’t make it to IPO. That investment is used as a rough benchmark for a portfolio company that’s performing fine, but isn’t going to be a 100x fund returner.

Since VCs only have one or two 100x returners per fund and a lot of 0s that they write off, they tend to model this type of outcome for their middle deals a lot more. They use M&A comps to gauge when it’s a good time to sell and also try to help their port cos get the best deal

For Growth Equity Investors

Growth equity investors also think about this from a valuation perspective. While they don’t have to pay the control premium, they can discount acquisition valuations.

However, in most cases, they end up valuing companies higher (closer to VC levels) because there’s some expectation of growth. They therefore use this to model outcomes when an IPO isn’t in sight.

Since growth equity shoots for a 3-5x return on their investment often to PE, they back into whether 3-5x is IPO scale. If not, then precedent transactions guide their exit math.

How Grata Can Help

If you’re interested in using M&A comps for private market investing, Grata can help. Our Market Research product, which is powered by our award-winning AI search, helps investors scope any market and find the most accurate deal data and comps so you can win more deals.

Grata’s platform quickly and easily provides the most relevant precedent transactions for the market or individual company that you’re assessing. With just a few clicks, you can access acquisition or enterprise values, deal types, employee estimates, and annual growth estimates so you have the right financial benchmarks.

You can search for a market using specific terms, as shown below:

Source: Grata

You can also generate M&A comps for the specific company you’re targeting. Our AI identifies similar companies to create the market and the appropriate M&A comps: