What are the 3 major valuation methodologies?
- Comparable companies
- Precedent Transactions
- DCF
Rank the 3 valuation methods from highest to lowest expected value.
Tricky. Generally:
- M&A Comps > Public Comps b/c of control premium
- DCF can go either way, depending on assumptions.
When would you not use a DCF?
- Unstable / unpredictable cash flows (startup)
- If debt / WC serve different purposes (i.e., banks don’t reinvest debt and have huge WC)
What other methods exist?
- Liquidation Valuation
- Replacement Value
- LBO Analysis
- SOTP
- M&A Premiums Analysis
- Future Share price Analysis
When would you use a Liquidation Valuation?
A bankruptcy scenario - see if equity will get anything. Also used to advise struggling businesses on whether it’s better to sell assets piecemeal or entirely.
When would you use SOTP?
When advising firms with multiple, disparate businesses - conglomerates like GE. Can’t use same set of comps for the whole company.
When do you use an LBO Analysis as part of your Valuation?
When contemplating an LBO, or establishing what a PE sponsor could pay, which tends to be lower than waht companies will pay.
VALUATION FLOOR.
What are the most common Valuation multiples?
EV /
- Revenue
- EBITDA
- EBIT
P/
- EPS
- BV per share
When using an industry-specific multiple, why do you use EV rather than Equity Value?
Because those resources (i.e., scientists) are available to all investors.
Would an LBO or a DCF give a higher valuation?
LBO, because it generally sets the floor.
How would you present the various Valuation methods to a company / investors?
“Football field” chart displaying the valuation range implied by each method.
How would you value an apple tree?
Same as a company:
- Look at comps (relative valuation)
- Value of its cash flows (e.g., apple sales)
Why can’t you use Equity Value / EBITDA?
Consistency - numerator is going to equity but denominator to equity and debt.
When would a Liquidation Valuation produce the highest value?
Company has lots of hard assets that are severely undervalued by the market. Very rare.
How would you value pre-profit, pre-sales Facebook?
A tech multiple, such as EV / Scientists or page views, derived from comps.
What would you use in conjunction with FCF multiples - Equity Value or EV?
DEPENDS:
- Unlevered FCF: EV
- Levered FCF: Equity Value
Would you ever use Equity Value / Revenue?
Very rarely, if looking at large financial institutions with lots of cash and negative EV. Would probably be using P/E or P/BV instead.
How do you pick comps?
Similar: - Industry - Size, growth, risk, amrgins - Geography For M&A, consider time frame.
How do you apply the 3 valuation methods to actually get a value?
Take the median multiple of a set and multiply by the relevant metric from the company. To make a football field, use the min, median and max (maybe 25th/75th).
What do you actually use a valuation for?
in pitches and client presentations to inform the client of what they should expect.
Also used in Fairness Opinions.
Uses - defense analyses, merger models, LBO models, DCFs.
Why would a company with similar growth and profitability to its Comps be valued at a premium?
Could be less risky, could be much larger.
Canned answers:
- Recently beat earnings exp. and stock popped
- Non-financial competitive advantage (IP)
- Won a big lawsuit
- Market leader and has more market share
What flaws are there with public company comps?
- no company is 100% comparable to another
- Stock market is emotional
- Stock prices for small, illiquid companies may be inaccurate
How do you account for a company’s competitive advantage in a valuation?
- Use 75% multiple instead of median
- Add a premium to multiple
- Use more aggressive projections
When might M&A Comps produce a lower multiple than Public Company Comps?
Mismatch between M&A market and public market - only small, private companies have been acquired with low valuations.
