Valuation - Basic Flashcards
Rank the 3 valuation methodologies from highest to lowest expected value.
There is no ranking that always holds.
In general, precedent transactions will be higher than comparable companies due to the control premium built into acquisitions.
Beyond that, DCF could go either way and it’s best to say that it’s more variable than other methodologies. Often it produces the highest value, but it can produce the lowest value as well depending on your assumptions.
What are the 3 major valuation methodologies?
Comparable Companies, Precedent Transaction and DCF
When would you not use a DCF in a valuation?
You do not use a DCF if the company has unstable or unpredictable cash flows or when debt and working capital serve a fundamentally different role.
What other valuation methodologies are there?
Liquidation valuation
Replacement value
LBO analysis
Sum of the parts
M&A premium analysis
Future Share Price analysis
When would you use a Liquidation Valuation?
This is common in bankruptcy scenarios and is used to see whether equity shareholders will receive any capital after the company’s debts have been paid off. It is often used to advise struggling businesses on whether it’s better to sell off assets separately or to try and sell the entire company.
When would you use Sum of the Parts?
This is most often used when a company has completely different, unrelated divisions - a conglomerate like GE
When do you use an LBO Analysis as part of your Valuation?
To establish how much a private equity firm could pay, which is usually lower than what companies will pay.
What are the most common multiples used in Valuation?
EV/Revenue
EV/EBIT
P/E
P/BV
Would an LBO or DCF give a higher valuation?
Technically it could go either way, but in most cases the LBO will give you a lower valuation.
How would you present the Valuation methodologies to a company or its investors?
Usually, you use a “football field” chart where you show the valuation range implied by each methodology. You always show a range rather than one specific number.
Why can’t you use Equity Value / EBITDA as a multiple rather than Enterprise Value / EBITDA?
EBITDA is available to all investors in the company - rather than just equity holders. Similarly, Enterprise Value is also available to all shareholders, so it makes sense to pair them together.
Equity Value / EBITDA, however, is comparing apples to oranges because Equity Value does not reflect the company’s entire capital structure - only the part available to equity investors.W
When would a Liquidation Valuation produce the highest value?
This is highly unusual, but it could happen if a company had substantial hard assets but the market was severely undervaluing it for a specific reason.
As a result, the company’s comparable companies and precedent transactions would likely produce lower values as well - and if its assets were valued highly enough, liquidation valuation might give a higher value than other methodologies.
Let’s go back to 2004 and look at Facebook back when it had no profit and no revenue. How would you value it?
You would use Comparable Companies and Precedent Transactions and look at more “creative” multiples such as EV / Unique Visitors and EV / Page viewers rather than EV / Revenue or EV / EBITDA.
You would not use a far in the future DCF because you can’t reasonably predict cash flows for a company that is not even making money yet.
