Valuation Flashcards
Three main valuation methodologies, ranked from highest to lowest expected value
Comparable companies, precedent transaction and DCF
No ranking always holds. IN general PTA will be higher than comps du to control premium built into acquisitions
DCF can go either way as its very precise but highly variable
When do you not use a DCF
Unstable or unpredictable CF (tech, start up) or when debt and working capital serve a fundamentally different role (financial institutions)
When would you use LBO
When looking at a leveraged buyout, or to establish how much a PE company may pay which is lower than a strategic investor. Used to set a floor of valuation
Most common multiples
EV over…
Rev
EBITDA
EBIT
P over…
Earnings
Book value
Industry specific multiples
Tech
EV over Unique visitors or page views
In industry specific multiples, use EV because the things in the multiple are available to all investors
LBO or DCF to give higher valuation
Could go either way. LBO is usually on the low side, but DCF is highly assumption dependent and wide range of values
How to present valuation methodologies
You rank them based on their valuation range implied by each methodology
How to value an apple tree
By looking at comparable apple trees for relative valuation and valuing apple trees cash flow for intrinsic valuation
Why cannot use MV over EBITDA
EBITDA is attributable to all investors in the company rather than just equity holders
MV does nto reflect capital structure, only part available to equity investors
How to value a start up with no profit or revenue
Use CCA or PTA, or use creative and industry multiples.
Do not use DCF as you cannot reasonably predict the CF
What to use with FCF multiples, EV or MV
Unlevered (excludes interest and thus represents money for all investors) FCF use EV
Levered FCF (includes interest payments and thus is money for equity investors as debt investors have been paid) use MV
How to select comparable companies or precedent transactins
Industry (most important)
Financial similarities, revenue EBITDA
Geography
EX for comparable screen
OIl an gas producers with market caps over 5b
How do you actually get a value for the company
Take median multiple of a set of companies or transactions and then multiply by relevant metric (EBITDA)
Football field you take 25th and 75th percentile
What do you use the valuation for
You use it for pitch books and in client presentations when providing updates
Negociations
Why would a comparable company be valued at a premium
Just reported above average earnings
Competitive advantage not reflected in financials
Marketleader and larger MS than competition
What are comparable companie flaws
Never 100% match
Stock market is emotional, mutliples may be dramatically higher or lower bc of market movements
Thin
How to take a company’s competitive advantage into account
Take 75th percentile rather than median
Add premium to multiples
or use more aggressive projection
Why use mediam 1
Not a real rule, use judgeemnt. If company is in distress, use 25th percentile.
What are PTA flaws
Rarely 100% match
Data is hard to find, especially for small private firms
Same financial profile but one EBITDA multiple is double the others
Reasons
Bad news or depressent MV so acquired at a discount
One process was more competitive and had more bidders
Why prefer EBIT to EBITDA
Because EBITDA excludes often siyeable CAPEX, may hide how much cas the company is using to finance their oeprations
Gap can be large where it is capital intensive
Difference bewteen EV over EBIT, EBITDA and P over E
All measure profitability
P over E depends on capital structure whereas EV are capital structure neutral
Use P over E for banks and financial isntitutions
EBIT includes D and A, so use where D and A is large and where CAPEX and fixed assets are impoartant (manufacturing)
EBITDA where D and A is smaller (software)
Vending machine Q
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How to value private company
Use same 3 methods but with differences
Discount 10 to 15% as not as liquid
DCF is tricky without beta, estimate WADD based on public comps wacc
Why not discount 10 15 % for PTA multuples for private company
PTA you acquire entire company. Once the company is acquired, it becomes illiquid
Can you use private companies as part of your valuation
Only for PTA.
Doesnt make sense for CCA or DCF as CoC is not public so no values for MV or beta
