Key Rule 5

Question 1

Entire purpose of a valuation is to

Answer 1

give a client an idea of what it’s worth, to justify (or argue against) an acquisition offer or a price at which you invest, and also to approximate a company’s value for internal purposes.

Question 2

Always present a valuation via

Answer 2

“Football Field” graph shown above and you focus on ranges rather than specific numbers.

Question 3

A company may be valued at a premium or discount for many reasons, including

Answer 3

its market position, competitive advantages that are not reflected in the financial statements (employees, IP, legal rulings, product benefits), and recent news and announcements

Question 4

You can pick certain multiples and ranges or focus on them for many reasons – for example, if a company is truly outperforming its peers, maybe you’ll focus on

Answer 4

the 75th percentile in a set of comps when displaying the multiples and the “Football Field” graph.

Question 5

Accounting choices and oddities can also greatly affect valuation – for example, owning vs. leasing buildings makes a big impact on EBITDA.

Answer 5

Own - depreciation and interest expenses neither of which are reflected in EBITDA
Lease - rental expense show up in EBITDA and reduces it

Question 6

what should you do if a company has no profit and/or no revenue?

Answer 6

If it’s unprofitable (negative Net Income), you can still use revenue multiples or possibly cash flow-based multiples… but a DCF is relatively useless unless you project it far into the future.

E.g. internet start-ups
1. Alternate metrics and multiples, like Enterprise value/ Unique visitors, etc
2. Sometimes for biotech or pharma, can actually create far in future multi-stage DCF, more acceptable as potential profit from a drug with a known market size easier to estimate than a random interest startup.