VALUATION METHODS
CHEAT SHEET
1. Comparable Companies
Analysis (Comps)
What it is: A market-based valuation
method where you compare the target
company with similar companies
(peers) in the same industry.
How it works: Uses multiples like P/E
(Price-to-Earnings), EV/EBITDA
(Enterprise Value to Earnings Before
Interest, Taxes, Depreciation, and
Amortization), or P/S (Price-to-Sales).
Pros: Simple, reflects market
conditions.
Cons: Hard to find truly comparable
companies; values can fluctuate with
market conditions.
2. Precedent Transactions
Analysis
What it is: Based on past transactions
of similar companies in the same
industry.
How it works: Looks at the price paid
for similar businesses in recent deals,
using valuation multiples from these
transactions.
Pros: Captures industry trends and
transaction-specific values.
Cons: Limited data on private deals;
might include a control premium that
inflates the value.
3. Discounted Cash Flow (DCF)
Analysis
What it is: An intrinsic valuation
approach, valuing a business based on
its projected future cash flows.
How it works: Forecasts cash flows,
discounts them back to the present
value using WACC (Weighted Average
Cost of Capital).
Pros: Detailed, forward-looking,
company-specific.
Cons: Highly sensitive to assumptions;
small changes in growth rate or
discount rate can greatly affect
valuation.
4. Sum of the Parts (SOTP)
What it is: Values each division or
subsidiary of a company separately
and then adds them up.
How it works: Analyzes and values
each business segment, typically using
different multiples or methods.
Pros: Suitable for conglomerates or
diversified businesses.
Cons: Complex and time-consuming;
hard to value synergies between
divisions.
5. Leverage Buyout (LBO)
Analysis
What it is: Common in private equity,
valuing a company based on the
returns a financial sponsor can achieve
with high leverage.
How it works: Projects the company’s
cash flows and calculates the potential
returns if bought primarily with debt.
Pros: Focuses on potential returns;
useful in M&A.
Cons: Not suitable for all companies;
highly dependent on the cost of debt
and debt levels.
6. Liquidation Valuation
What it is: Determines the value of a
company if all its assets were sold off
and liabilities paid, usually in a scenario
where the business is closing or going
bankrupt.
How it works: Assesses the net asset value
by valuing each asset at its estimated
liquidation price (often a fraction of book
value) and subtracting liabilities.
Pros: Useful in distressed situations;
provides a conservative "floor value" for
a company.
Cons: Often lower than going-concern
valuations; may overlook potential for
business recovery or intangibles like
brand value.
7. M&A Premium Analysis
What it is: A valuation method that
estimates the additional amount buyers are
willing to pay over a company's current
market price in a merger or acquisition.
How it works: Analyzes historical
acquisitions of similar companies to
determine the premium (typically expressed
as a percentage) that buyers paid above
the target company's unaffected stock price
before the deal was announced.
Pros: Useful in understanding acquisition
trends and what buyers might pay to gain
control or synergies.
Cons: Limited data for certain industries;
premiums vary widely based on strategic
fit, market conditions, and buyer
motivations.
8. Future Share Price Analysis
What it is: A valuation method that
estimates a company’s future share price
based on its projected financial
performance.
How it works: Forecasts key metrics like
earnings or EBITDA, applies a relevant
multiple (e.g., P/E, EV/EBITDA), and
discounts the estimated future price back
to the present value using an appropriate
discount rate.
Pros: Useful for estimating potential stock
performance and setting target prices.
Cons: Highly sensitive to assumptions
about growth rates, future multiples, and
market conditions; can be speculative.
9. Replacement Value
What it is: A valuation method that estimates
the cost to replace a company’s assets at
current market prices.
How it works: Calculates the total cost to
replicate the company’s assets and
infrastructure, adjusting for inflation or
current market conditions. This can include
the cost of physical assets, technology,
intellectual property, and workforce
replacement.
Pros: Useful for assessing minimum
investment required to recreate the business;
valuable for insurance purposes and in some
M&A negotiations.
Cons: Does not consider the company’s brand
value, customer base, or earning potential;
can be challenging to assess for specialized
assets.
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Anish Gazi