Ranking The Valuation Methodologies

Here we will talk about Which methodologies fit which situations and Which methodologies typically have a higher valuation, which ones typically give a lower valuation?

DCF (Discounted Cash Flow) : The most variable type of valuation, as a result of which it is highly sensitive to a variety of inputs and assumptions. It has the potential to be the most manipulated, but it also provides the most accurate insight into the intrinsic value. Problematic, especially if you rely heavily on the terminal multiple, and especially if the company has poor revenues and negative EBITDA—it may be difficult to predict its value at this point. Additionally, it is the simplest thing to memorize in an interview.

Precedent transactions: Typically, the strategic with the highest valuation, built-in control premium, and built-in control premium will have to pay a premium over what their shares are currently trading at in order to entice the seller. However, precedent transactions are still considered to be a type of comparison, and transaction comparisons can be extremely hit or miss depending on the level of M&A activity in the industry you are covering and the type of company you are advising. Aside from that, goodwill is frequently created as a result of premiums. This can be problematic, especially if you have to write it down if you discover that the assets or company you acquired are worse than the IBD analysts you hired predicted.

LBO: Given that private equity firms are unable to realize certain synergies that strategic buyers can, this is typically the lowest or "floor" valuation, as financial buyers pay lower multiples than strategic buyers. The most complex type of valuation, which is dependent on future assumptions and on the ability of a company to generate cash flows to pay down debt, is discounted cash flow valuation. It's the word "leveraged" that I like the most because it makes me feel intellectual. IRR can be easily manipulated through certain activities such as dividend recapping, and MOIC can be deceiving because it does not take into consideration time elapsed between investments.

Comps: Simple, and widely applicable across a wide range of industries. Each industry has its own well-known set of comps that it employs, which can be quite interesting to study. Very straightforward, but also very transferable across investing and banking environments.