The greater a target company’s leverage, the less cash, or acquirer’s shares, a buyer needs to control the target enterprise. Based on this idea, the Appraisal Foundation Working Group’s Discussion Draft, The Measurement and Application of Market Participant Acquisition Premiums, recommends as a best practice that appraisers adjust takeover premia for leverage. Previous recent research found empirical results consistent with this, namely, that higher equity takeover premia are related to higher pre-deal leverage levels, controlling for size, industry, profitability, and other factors. In this article, we provide valuation professionals with two methods with which to adjust observed transaction premia, based upon the subject appraised company’s leverage along with other company and deal characteristics that can be captured through use of readily available market data.
