Valuation Questions

What are the 3 major valuation methodologies?

Comparable Companies, Precedent Transactions and Discounted Cash Flow Analysis.

Rank the 3 valuation methodologies from highest to lowest expected value.

Trick question - 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, a DCF could go either way and it's best to say that it's m

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 (tech or bio-tech startup) or when debt and working capital serve a fundamentally different role. For example, banks and financial institutions do not re-invest debt and working

What other Valuation methodologies are there?

Other methodologies include:
-Liquidation Valuation - Valuing a company's assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive
-Replacement Value - Valuing a company based on t

When would you use a Liquidation Valuation?

This is most 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 se

When would you use Sum of the Parts?

This is most often used when a company has completely different, unrelated divisions - a conglomerate like General Electric, for example.
If you have a plastics division, a TV and entertainment division, an energy division, a consumer financing division a

When do you use an LBO Analysis as part of your Valuation?

Obviously you use this whenever you're looking at a Leveraged Buyout - but it is also used to establish how much a private equity firm could pay, which is usually lower than what companies will pay.
It is often used to set a "floor" on a possible Valuatio

What are the most common multiples used in Valuation?

The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price / Earnings per Share), and P/BV (Share Price / Book Value).

What are some examples of industry-specific multiples?

Technology (Internet): EV / Unique Visitors, EV / Pageviews
Retail / Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rent)
Energy: P / MCFE, P / MCFE / D (MCFE = 1 Million Cubic Foot Equivalent, MCFE/D = MCFE per Day)

When you're looking at an industry-specific multiple like EV / Scientists or EV / Subscribers, why do you use Enterprise Value rather than Equity Value?

You use Enterprise Value because those scientists or subscribers are "available" to all the investors (both debt and equity) in a company. The same logic doesn't apply to everything, though - you need to think through the multiple and see which investors

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.
Here's the easiest way to think about it: with an LBO, you do not get any value from the cash flows of a company in between Year 1 and the final year - you're o

How would you present these 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.

How would you value an apple tree?

The same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree's cash flows (intrinsic valuation).
Yes, you could do a DCF for anything - even an apple tree.

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

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 (such as an earnings miss or cyclicality).
As a result, the company's Comparable Companies and Precedent

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/Pageviews rather than EV/Revenue or EV/EBITDA.
You would not use a "far in the future DCF" because you can't reasonably p

What would you use in conjunction with Free Cash Flow multiples - Equity Value or Enterprise Value?

Trick question. For Unlevered Free Cash Flow, you would use Enterprise Value, but for Levered Free Cash Flow you would use Equity Value.
Remember, Unlevered Free Cash Flow excludes Interest and thus represents money available to all investors, whereas Lev

You never use Equity Value / EBITDA, but are there any cases where you might use Equity Value / Revenue?

Never say never. It's very rare to see this, but sometimes large financial institutions with big cash balances have negative Enterprise Values - so you might use Equity Value / Revenue instead.
You might see Equity Value / Revenue if you've listed a set o

How do you select Comparable Companies / Precedent Transactions?

The 3 main ways to select companies and transactions:
1. Industry classification
2. Financial criteria (Revenue, EBITDA, etc.)
3. Geography
For Precedent Transactions, you often limit the set based on date and only look at transactions within the past 1-2

How do you apply the 3 valuation methodologies to actually get a value for the
company you're looking at?

Sometimes this simple fact gets lost in discussion of Valuation methodologies. You take the median multiple of a set of companies or transactions, and then multiply it by the relevant metric from the company you're valuing.
Example: If the median EBITDA m

21. What do you actually use a valuation for?

Usually you use it in pitch books and in client presentations when you're providing updates and telling them what they should expect for their own valuation.
It's also used right before a deal closes in a Fairness Opinion, a document a bank creates that

22. Why would a company with similar growth and profitability to its Comparable Companies be valued at a premium?

This could happen for a number of reasons:
-The company has just reported earnings well-above expectations and its stock price has risen recently.
-It has some type of competitive advantage not reflected in its financials, such as a key patent or other in

What are the flaws with public company comparables?

-No company is 100% comparable to another company.
-The stock market is "emotional" - your multiples might be dramatically higher or lower on certain dates depending on the market's movements.
-Share prices for small companies with thinly-traded stocks ma

How do you take into account a company's competitive advantage in a valuation?

1. Look at the 75th percentile or higher for the multiples rather than the Medians.
2. Add in a premium to some of the multiples.
3. Use more aggressive projections for the company.
In practice you rarely do all of the above - these are just possibilities

Do you ALWAYS use the median multiple of a set of public company comparables or precedent transactions?

There's no "rule" that you have to do this, but in most cases you do because you want to use values from the middle range of the set. But if the company you're valuing is distressed, is not performing well, or is at a competitive disadvantage, you might u

You mentioned that Precedent Transactions usually produce a higher value than Comparable Companies - can you think of a situation where this is not the case?

Sometimes this happens when there is a substantial mismatch between the M&A market and the public market. For example, no public companies have been acquired recently but there have been a lot of small private companies acquired at extremely low valuation

What are some flaws with precedent transactions?

-Past transactions are rarely 100% comparable - the transaction structure, size of the company, and market sentiment all have huge effects.
-Data on precedent transactions is generally more difficult to find than it is for public company comparables, espe

Two companies have the exact same financial profile and are bought by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction - how could this happen?

Possible reasons:
1. One process was more competitive and had a lot more companies bidding on the target.
2. One company had recent bad news or a depressed stock price so it was acquired at a discount.
3. They were in industries with different median mult

Why does Warren Buffett prefer EBIT multiples to EBITDA multiples?

Warren Buffett once famously said, "Does management think the tooth fairy pays for capital expenditures?"
He dislikes EBITDA because it excludes the often sizable Capital Expenditures companies make and hides how much cash they are actually using to finan

he EV / EBIT, EV / EBITDA, and P / E multiples all measure a company's profitability. What's the difference between them, and when do you use each one?

P / E depends on the company's capital structure whereas EV / EBIT and EV / EBITDA are capital structure-neutral. Therefore, you use P / E for banks, financial institutions, and other companies where interest payments / expenses are critical.EV / EBIT inc

If you were buying a vending machine business, would you pay a higher multiple for a business where you owned the machines and they depreciated normally, or one in which you leased the machines? The cost of depreciation and lease are the same dollar amoun

You would pay more for the one where you lease the machines. Enterprise Value would be the same for both companies, but with the depreciated situation the charge is not reflected in EBITDA - so EBITDA is higher, and the EV / EBITDA multiple is lower as a

How do you value a private company?

You use the same methodologies as with public companies: public company comparables, precedent transactions, and DCF. But there are some differences:
-You might apply a 10-15% (or more) discount to the public company comparable multiples because the priva

Let's say we're valuing a private company. Why might we discount the public company comparable multiples but not the precedent transaction multiples?

There's no discount because with precedent transactions, you're acquiring the entire company - and once it's acquired, the shares immediately become illiquid.
But shares - the ability to buy individual "pieces" of a company rather than the whole thing - c

Can you use private companies as part of your valuation?

Only in the context of precedent transactions - it would make no sense to include them for public company comparables or as part of the Cost of Equity / WACC calculation in a DCF because they are not public and therefore have no values for market cap or B

*How do you value banks and financial institutions differently from other companies?

You mostly use the same methodologies, except:
-You look at P / E and P / BV (Book Value) multiples rather than EV / Revenue, EV / EBITDA, and other "normal" multiples, since banks have unique capital structures.
-You pay more attention to bank-specific m

*Walk me through an IPO valuation for a company that's about to go public.

1. Unlike normal valuations, for an IPO valuation we only care about public company comparables.
2. After picking the public company comparables we decide on the most relevant multiple to use and then estimate our company's Enterprise Value based on that.

* I'm looking at financial data for a public company comparable, and it's April (Q2) right now. Walk me through how you would "calendarize" this company's financial statements to show the Trailing Twelve Months as opposed to just the last Fiscal Year.

The "formula" to calendarize financial statements is as follows:
TTM = Most Recent Fiscal Year + New Partial Period - Old Partial Period
So in the example above, we would take the company's Q1 numbers, add the most recent fiscal year's numbers, and then s

*Walk me through an M&A premiums analysis.

The purpose of this analysis is to look at similar transactions and see the premiums that buyers have paid to sellers' share prices when acquiring them. For example, if a company is trading at $10.00/share and the buyer acquires it for $15.00/share, that'

*Walk me through a future share price analysis.

The purpose of this analysis is to project what a company's share price might be 1 or 2
years from now and then discount it back to its present value.
1. Get the median historical (usually TTM) P / E of your public company comparables.
2. Apply this P / E

*Both M&A premiums analysis and precedent transactions involve looking at previous M&A transactions. What's the difference in how we select them?

-All the sellers in the M&A premiums analysis must be public.
-Usually we use a broader set of transactions for M&A premiums - we might use fewer than 10 precedent transactions but we might have dozens of M&A premiums. The industry and financial screens a

*Walk me through a Sum-of-the-Parts analysis.

In a Sum-of-the-Parts analysis, you value each division of a company using separate comparables and transactions, get to separate multiples, and then add up each division's value to get the total for the company. Example:
We have a manufacturing division

*How do you value Net Operating Losses and take them into account in a valuation?

You value NOLs based on how much they'll save the company in taxes in future years, and then take the present value of the sum of tax savings in future years. Two ways to assess the tax savings in future years:
1. Assume that a company can use its NOLs to

*I have a set of public company comparables and need to get the projections from equity research. How do I select which report to use?

This varies by bank and group, but two common methods:
1. You pick the report with the most detailed information.
2. You pick the report with numbers in the middle of the range.
Note that you do not pick reports based on which bank they're coming from. So

*I have a set of precedent transactions but I'm missing information like EBITDA for a lot of the companies - how can I find it if it's not available via public sources?

1. Search online and see if you can find press releases or articles in the financial press with these numbers.
2. Failing that, look in equity research for the buyer around the time of the transaction and see if any of the analysts estimate the seller's n

*How far back and forward do we usually go for public company comparable and precedent transaction multiples?

Usually you look at the TTM (Trailing Twelve Months) period for both sets, and then you look forward either 1 or 2 years. You're more likely to look backward more than 1 year and go forward more than 2 years for public company comparables; for precedent t

*I have one company with a 40% EBITDA margin trading at 8x EBITDA, and another company with a 10% EBITDA margin trading at 16x EBITDA. What's the problem with comparing these two valuations directly?

There's no "rule" that says this is wrong or not allowed, but it can be misleading to compare companies with dramatically different margins. Due to basic arithmetic, the 40% margin company will usually have a lower multiple - whether or not its actual val

*Walk me through how we might value an oil & gas company and how it's different from a "standard" company.

You use the same methodologies, except:
-You look at industry-specific multiples like P / MCFE and P / NAV in addition to the more standard ones.
-You need to project the prices of commodities like oil and natural gas, and also the company's reserves to d

* Walk me through how we would value a REIT (Real Estate Investment Trust) and how it differs from a "normal" company.

Similar to energy, real estate is asset-intensive and a company's value depends on how much cash flow specific properties generate.
-You look at Price / FFO (Funds From Operations) and Price / AFFO (Adjusted Funds From Operations), which add back Deprecia

How do you value a company?

You can use Public Company Comparables, Precendent Transactions, and the Discounted Cash Flow Analysis. The first two are relative valuations, valuing the company by how similar companies were worth. The last one, DCF Analysis is an example of Intrinsic V

When do you use which methodology?

Generally you use all 3 because they are the most common, there are however some cases that these are not all valuable. A DCF Analysis would not make sense for a small startup without much Cash Flow and such. Some cases when you don't have enough informat

Which valuation will give you the highest valuation?

Kind of a Trick question, no one valuation will give you a higher, but generally Precedent Transactions will give the higher because it is when one company acquires another and will have to pay extra to take commanding majority. A DCF is the most sensitiv

How do you select the companies to use in Comparables Companies and Precedent Transactions?

For Public Company Comparables, there are three criteria you can use: Geography (US based, UK based, country or region) Industry (Hardware, Networking, Software, etc.) Financial Size (Revenue, Market Cap, EBITDA, etc.)
For Precedent Transactions, there ar

How do you find the data for Comparable Companies and Precedent Transactions?

You would go to the company's filings to get historical information (their latest 10-K or 10-Q, annual or quarterly report), take the information on shares outstanding, information on cash, debt, minority interest, preferred stock, options, historical rev

Do you always use the Median Multiple for the Methodologies?

We take a range of data, from Minimum through maximum, but for the most part, we base our summary graph around the Median because it is right in the middle. But no, you don't have to use the median. If the company is performing well and closely matches th

What are some of the flaws with Public Company Comparables and Precedent Transactions?

For Public Company Comparables it is truly difficult to find a company that is close to the one you're comparing, especially when it is unique like Apple. Another flaw is the stock market is emotional, so if a company is doing really well lately, it is re

How do you value an Apple Tree, a Lemonade Stand, a Donut Shop, basically anything that is not a company?

Just like valuing a company you can use relative valuation, or intrinsic valuation. Relative valuation of a lemonade stand, you would look at similar lemonade stands and see what their values are. Intrinsic, you would calculate how much cash flow your lem

What do you do if you have a company that has no profit, or no revenue?

If a company has no profit, it is easier, you generally focus more on revenue multiples. Ex. Tech startups, or internet startups
If a company has no revenue, (ex. Facebook) we would generally use metrics like Enterprise Value/Unique Visitors, or Enterpris

What are some other different valuation methodologies?

There are dozens of different, some of the most common other ones include: Sum of the Parts: value each department, then sum them up to get the value of the entire company. Liquidation Valuation: go to a company's balance sheet, and assume that they sell

Industry-specific valuations?

Most of the time the methodologies themselves are very similar, so you can use these methods in different industries, but sometimes you use different multiples and make changes to methodologies. For Financial Institutions, you would use a Dividend Discoun

Why is it that two companies with the same profiles will be valued differently?

Sometimes a company's recent performance can affect its stock, if the company has some irrational exuberance about it, investors really like it, it may be valued at a premium compared to other companies out there, there are a number of reasons

What do you do when you are valuing a private company?

Most of it is the same, but the key changes are as follows: Public Comps with a 10%-15% discount to multiples because it is not as liquid. Precedent Transactions stay the same. The DCF - WACC is problematic to calculate because this company is not public

What do we actually use a valuation for?

There are a couple ways to use it: Internally, you're company is looking at acquiring someone else or other things. Pitching to other companies, saying if you let us sell you, we can get this value for you. Working with a company on a deal, create a valua