Valuation (basic)

Question 1

1. What are the 3 major valuation methodologies?

Answer 1

1. Comparable Companies Analysis (Public Comps)
   Values a company based on how similar publicly traded companies are valued by the market
   Uses multiples such as:
   EV / EBITDA
   EV / Revenue
   Price / Earnings (P / E)
   Based on the idea that similar businesses should have similar valuation metrics
   Reflects current market sentiment and relative valuation
2. Precedent Transactions Analysis (Transaction Comps)
   Values a company based on what others have paid to acquire similar companies
   Focuses on actual acquisition prices and includes control premiums (extra amount an acquirer is willing to pay above the market price to gain full control of a company, often to make strategic decisions or realise synergies)
   Typically results in a higher valuation than comps because buyers pay a premium to acquire control
   Useful in M&A scenarios
3. Discounted Cash Flow (DCF) Analysis
   Projects a company’s free cash flows over 5–10 years
   Discounts those cash flows and the terminal value back to the present using the discount rate (WACC)
   Produces an intrinsic valuation, independent of market conditions
   Most theoretically sound but also the most sensitive to assumptions (e.g. growth rates, discount rate)

Question 2

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

Answer 2

No fixed ranking, just a general trend but:
1. Precedent Transactions
Usually produces the highest valuation
Includes control premiums paid by acquirers (often 20–30% above market value)
2. DCF Analysis
Highly sensitive to assumptions (growth, margins, WACC)
Tends to give a wide valuation range, but can be higher or lower than comps depending on inputs
3. Comparable Companies (Public Comps)
Based on current market conditions
Reflects how investors value similar businesses today
Typically produces the lowest valuation since it excludes premiums

Question 3

3. When would you not use a DCF in a Valuation?

Answer 3

When the company has unpredictable or unstable cash flows
e.g. early-stage startups, turnaround businesses, cyclical industries
When future projections are unavailable or unreliable
e.g. private companies that don’t provide detailed forecasts
When the business is asset-heavy and better valued using a liquidation or asset-based approach
e.g. real estate holding companies, investment firms
When market-based methods (comps or transactions) provide more meaningful benchmarks
e.g. if the company operates in a highly commoditised industry with lots of public comparables

Question 4

4. What other Valuation methodologies are there?

Answer 4

Beyond the core three (Public Comps, Precedent Transactions, and DCF), other valuation methods include:
1. Leveraged Buyout (LBO) Analysis
Values a company based on the returns a financial sponsor (like a private equity firm) would earn using debt to fund the acquisition
Often produces a lower valuation (because buyers focus on achieving a strong internal rate of return)
2. Sum of the Parts (SOTP)
Values each business unit or division separately, then adds them together
Used for conglomerates or companies with multiple, unrelated segments
3. Liquidation Valuation
Estimates what a company’s assets would be worth if it were sold off and liquidated today
Often used for distressed companies
4. Replacement Cost
Based on how much it would cost to rebuild the company from scratch
Rarely used in practice, but sometimes considered for insurance or infrastructure

Question 5

5. When would you use a Liquidation Valuation?

Answer 5

You use a Liquidation Valuation when a company is in financial distress or bankruptcy, and you need to assess the value if its assets were sold off individually
Typical use cases:
Restructuring or turnaround situations
Bankruptcy proceedings
When advising creditors or buyers considering a distressed acquisition
To test whether the company’s market value exceeds its break-up value
What it assumes:
The company stops operating as a going concern (the company is no longer expected to continue running, will shut down and sell off all its assets to pay creditors or investors)
Assets like inventory, receivables, property, and equipment are sold off at a discount
You apply conservative recovery rates to each asset class
Why it’s useful:
Helps investors or lenders determine whether they would recover their investment if the company shut down
Provides a valuation floor — the minimum a company might be worth

Question 6

6. When would you use Sum of the Parts?

Answer 6

You use Sum of the Parts (SOTP) when a company has multiple distinct business divisions or operates across very different industries
Instead of valuing the entire company as one unit, you value each segment separately, then add them together
When it’s useful:
For conglomerates or diversified firms (e.g. General Electric, Amazon, Disney)
When each division has:
Different growth rates
Different risk profiles
Different valuation multiples
How it works:
1. Split the company into segments or business units
2. Value each unit using the most appropriate method (e.g. EV/EBITDA for one, DCF for another)
3. Add the segment values together
4. Subtract net debt and other adjustments to get total Equity Value
Why it’s used:
Gives a more accurate picture of what each part of the company is worth
Helps highlight undervalued divisions or justify spin-offs or breakups

Question 7

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

Answer 7

You use an LBO (Leveraged Buyout) Analysis when evaluating a company as a potential acquisition target for a financial sponsor (e.g. private equity firm)
The goal is to determine how much a sponsor could pay today while still achieving a desired return (usually around 20–25% IRR)
The idea is to:
Use the company’s own cash flows to repay the debt over time
Then, after a few years, sell the company at a profit
Most of the return comes from financial leverage — using debt to amplify the equity return
Why is it called “leveraged”?
Because the buyer uses debt (leverage) to fund most of the purchase price — sometimes 60–80% or more.
Think of it like a mortgage:
You buy a house with 20% cash and 80% debt
If the house increases in value, your cash-on-cash return is much higher
But the risk is higher too — since you must repay the loan
Why it’s part of valuation:
It sets a floor for valuation — what a financial buyer would pay based on cash flows and leverage
Because PE firms aim to use as little equity as possible, their valuations are usually lower than those from strategic buyers or DCFs
When it’s commonly used:
In buy-side M&A deals where private equity is involved
In valuation benchmarking to test how low the value might reasonably go
In competitive sale processes, where both PE and strategic buyers are bidding
An LBO Analysis is not about estimating “fair value” — it’s about what a sponsor could afford to pay while still hitting their target return, based on the company’s cash flows and debt capacity.

Question 8

8. What are the most common multiples used in Valuation?

Answer 8

Enterprise Value (EV) Multiples
These reflect the value of the entire business, including debt and equity — useful for comparing companies with different capital structures.
EV / Revenue
Compares total company value to its sales
Used for early-stage or low-margin businesses that may not have profits yet
Shows how much investors are paying per dollar of revenue
EV / EBITDA
Compares value to cash earnings before interest, tax, depreciation, and amortisation
Most commonly used multiple — helps compare core operating performance across companies
EV / EBIT
Includes depreciation and amortisation, so it’s closer to true operating profit
Useful for capital-intensive industries where D&A is meaningful
Equity Value (Market Cap) Multiples
These reflect the value available to shareholders only — affected by the company’s capital structure.
P / E (Price / Earnings)
Share price divided by earnings per share (EPS)
Most familiar multiple to public investors
Best used for mature, profitable companies
P / Book (Price / Book Value)
Compares share price to book value of equity
Common in financial institutions or asset-heavy sectors (like banks or insurance)
P / Cash Flow
Share price divided by operating or free cash flow
Useful when earnings are distorted by non-cash items or accounting differences

Question 9

9. What are some examples of industry-specific multiples?

Answer 9

Technology / Internet:
EV / Unique Visitors
Used for early-stage tech or media platforms with no profits
Measures value based on audience reach
EV / Pageviews
Similar idea — relevant for advertising-driven businesses
Retail / Consumer:
EV / EBITDA — still common
EV / Revenue per Store
Useful for comparing performance across chains with physical locations
EV / Same-Store Sales Growth
Tracks how existing stores are growing, excluding new store openings
Energy:
EV / EBITDAX
EBITDA + Exploration Expense — used in oil & gas, where exploration is a major cost
EV / Daily Production
Measures value per barrel of oil equivalent (BOE) produced per day
EV / Proven Reserves
Measures value per unit of extractable reserves
Financial Institutions:
Price / Book Value (P / BV)
Since assets and liabilities are marked to market, book value is meaningful
P / Earnings
Also widely used for banks and insurers
Healthcare / Biotech:
EV / R&D Spend
Used for early-stage biotech firms with no revenue yet
Focuses on investment in innovation pipeline

Question 10

10. 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?

Answer 10

Enterprise Value reflects the entire value of the business, including both debt and equity holders
Industry-specific metrics like scientists, users, or subscribers represent the company’s total operational output or scale — not just what belongs to shareholders
Why not use Equity Value?
Equity Value only reflects the portion attributable to shareholders
It ignores debt, even though debt holders also benefit from the company’s operations
Using Equity Value would understate the cost to acquire or operate the full business
Always match the numerator and denominator in a multiple
If the denominator reflects total company performance, the numerator should be Enterprise Value

Question 11

11. Would an LBO or DCF give a higher valuation?

Answer 11

Usually, a DCF gives a higher valuation than an LBO
A DCF values a company based on its free cash flows and assumes the company is held indefinitely
An LBO values a company based on the returns required by a financial buyer (e.g. a private equity firm), who aims to exit after 3–7 years with a target IRR
Why DCF is usually higher:
A DCF doesn’t have a strict return hurdle — it values cash flows directly
An LBO model assumes the buyer uses as little equity as possible and needs a high return, so they’ll usually pay less
Exception:
If the company’s cash flows are very stable and debt capacity is high, the LBO valuation might come close to or match the DCF value

Question 12

12. How would you present these Valuation methodologies to a company or its investors?

Answer 12

1. Present a valuation range, not a single number
   Valuation is not precise — so present it as a range for each methodology, not one fixed point
   Example:
   Comparable Companies: $450M – $550M
   Precedent Transactions: $500M – $600M
   DCF Analysis: $480M – $620M
   LBO Analysis (if relevant): $400M – $500M (floor valuation)
2. Explain the assumptions and inputs clearly
   For each method, highlight the key assumptions:
   Public Comps:
   What companies were selected? What multiples were used?
   Precedent Transactions:
   How recent were they? What type of buyers?
   DCF:
   What growth rates, WACC, and terminal value assumptions were used?
   LBO (if included):
   What IRR target was assumed? How much leverage?
   This shows you understand the drivers of value and helps investors or management evaluate the credibility of each range.
3. Use a football field chart for visual impact
   A football field chart shows all valuation methods plotted on the same horizontal axis
   Visually compares the low and high ends of each method side by side
   Makes it easy to see which methods are more conservative or aggressive
4. Tailor the emphasis based on the context
   For internal decision-making, DCF and comps may be most relevant
   For M&A, buyers will care about precedent transactions and LBO feasibility
   For investors, you may emphasise market-based comps (e.g. how does the market currently value similar companies?)

Question 13

13. How would you value an apple tree?

Answer 13

Consider:
1. What the apple tree produces (future economic benefit)
2. What similar trees are worth (market-based comparison)
3. How long it will live and whether the tree will grow, stay flat, or decline
4. The cost of replacing it, in case it had to be re-grown
Approach 1: Discounted Cash Flow (DCF) Valuation
Treat the apple tree like a business generating cash flows.
Project its annual apple production — e.g. 500 apples per year
Estimate revenue: apples × price per apple (e.g. 500 × $2 = $1,000)
Deduct costs: water, fertiliser, pruning, harvesting, labour, etc.
→ Let’s say total cost = $300
→ Net cash flow = $700 per year
Forecast cash flows over its useful life — e.g. 20 years
Discount those cash flows to present value using a discount rate that reflects the risk of the tree not producing as expected
Could be 8–12%, depending on assumptions
Add a terminal value if you believe the tree could continue producing indefinitely
This gives you an intrinsic value based on the tree’s future earning power.
Approach 2: Comparable Asset Valuation (Comps)
Use market comparables — find other apple trees recently bought or sold.
Let’s say similar trees that produce 500 apples/year are worth $7,000
That implies a multiple of $14 per apple of annual output
Apply that to your tree: 500 × $14 = $7,000 valuation
This is the relative valuation method — based on what others are paying for similar assets.
Approach 3: Asset-Based Valuation (Replacement Cost)
Estimate the cost to replant and grow a similar tree to the same stage.
Cost of sapling + land + care over 5–10 years = $3,000
This approach is useful if the tree is newly planted or not producing cash flows yet
Often used as a floor valuation — especially in liquidation
Optional: LBO Logic
In a creative twist, you could also mention:
A buyer could use borrowed money to buy the tree and repay the loan using apple sales
This would lead to a leveraged buyout valuation based on IRR targets
Not necessary, but shows advanced thinking if appropriate for the interview

Question 14

14. Why can’t you use Equity Value / EBITDA as a multiple rather than Enterprise Value / EBITDA?

Answer 14

EBITDA reflects the performance of the entire business, before interest and taxes — it’s independent of how the business is financed
Equity Value, on the other hand, reflects value only to shareholders, after debt and interest have been accounted for
So you’re mismatching the numerator and denominator:
EBITDA is a pre-debt, company-wide measure
Equity Value is a post-debt, shareholder-only measure
→ The result would be inconsistent and misleading
Correct pairing:
Use Enterprise Value / EBITDA
Both reflect the entire business (value and performance)
Use Equity Value / Net Income
Both reflect value and earnings just for shareholders

Question 15

15. When would a Liquidation Valuation produce the highest value?

Answer 15

This is very rare, but it can happen in unusual circumstances — typically when:
1. Market valuations are severely depressed (e.g. during a crisis or recession), causing Equity Value and Enterprise Value to fall below asset value
2. The company has significant hard assets (e.g. real estate, inventory, or equipment) that are more valuable when sold off than when used in operations
3. The company’s earnings are weak, but it owns valuable non-operating assets (e.g. undeveloped land, patents, or excess cash)
Example:
A struggling manufacturing firm owns a lot of high-value land or equipment
The market undervalues the firm based on poor profits, but the break-up value of the assets exceeds what buyers would pay for the business as a going concern

Question 16

16. Let’s go back to 2004 and look at Facebook back when it had no profit and no revenue. How would you value it?

Answer 16

In early-stage cases like this — no revenue, no profit — you can’t use traditional valuation methods like DCF, EV/EBITDA, or P/E. Instead, you’d rely on:
1. Comparable Company Metrics (non-financial)
Use metrics like EV / Users, EV / Active Accounts, or EV / Pageviews
Look at how similar early-stage internet companies were valued at the time
Estimate Facebook’s value based on user base growth, engagement, or reach
2. Precedent Transactions
Look at how investors valued other early-stage social media or tech platforms
Adjust for differences in scale, growth, and user retention
3. Venture Capital (VC) Approach
Project long-term revenue or user growth
Estimate a future exit value (e.g. sale or IPO at a revenue or EBITDA multiple)
Discount that exit value back to present using a high discount rate (30–50%) to reflect risk

Question 17

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

Answer 17

You use Enterprise Value when applying multiples to Free Cash Flow to the Firm (FCFF)
FCFF is cash flow available to all capital providers (debt and equity)
So it must be compared to the total value of the business: Enterprise Value
You use Equity Value when applying multiples to Free Cash Flow to Equity (FCFE)
FCFE is cash flow after interest and debt repayments
It reflects cash flow available to shareholders only

Question 18

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

Answer 18

Yes — rare, but might be used in specific, limited cases:
1. For financial institutions:
Banks, insurance companies, and asset managers use Equity Value-based multiples, because Enterprise Value doesn’t apply well
Revenue is often a useful proxy when profit-based metrics are distorted
2. When a company has no EBITDA or negative EBITDA:
If the company is generating revenue but no operating profit, you may compare Equity Value / Revenue as a rough benchmark
Why this is rare:
EBITDA reflects the company’s cash operating performance, so it’s more meaningful for comparing valuations
Equity Value / Revenue mixes levels: you’re comparing post-debt value (Equity) with a pre-debt measure (Revenue) — so it’s normally avoided

Question 19

19. How do you select Comparable Companies / Precedent Transactions?

Answer 19

1. Industry / Sector
   Look for companies in the same industry, using the same business model
   Use classification systems like NAICS or SIC codes as a starting point
2. Geography
   Prioritise companies that operate in the same region or market
   Market conditions, customer behaviour, and regulation can vary significantly by geography
3. Size & Scale
   Choose companies with similar revenue, EBITDA, market cap, or employee count
   Helps ensure that the multiples reflect similar cost structures and growth potential
4. Growth & Margins
   Align with companies that have comparable growth rates, profitability, and margin profiles
5. Timing (for Precedent Transactions)
   Choose transactions that occurred in a similar market environment
   Recent transactions are more relevant than those from many years ago

Question 20

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

Answer 20

Comparable Companies Analysis (Public Comps):
1. Identify a group of similar public companies
2. Calculate their valuation multiples (e.g. EV/EBITDA, P/E)
3. Apply the median or appropriate range of those multiples to the target company’s financial metrics
4. Result: a valuation range based on how the market values similar businesses
Precedent Transactions Analysis:
1. Identify similar companies that were acquired recently
2. Calculate the multiples paid in those deals
3. Apply those multiples to your target’s metrics
4. Usually gives a higher valuation due to control premiums
Discounted Cash Flow (DCF):
1. Project the company’s future free cash flows
2. Discount them back to present value using the discount rate (WACC)
3. Add the terminal value and sum to get the company’s intrinsic value
Final Step:
You now have three valuation ranges
Present them in a summary table or football field chart
Use your judgement (or context of the transaction) to weigh the methods and suggest a final value or range

Question 21

21. What do you actually use a valuation for?

Answer 21

Almost every major financial or strategic decision involving a business
1. Mergers & Acquisitions (M&A)
To determine a purchase price for a company being acquired or sold
Helps both buyers and sellers negotiate fairly
2. Investment decisions
Investors use valuations to decide whether a stock is undervalued or overvalued
Helps in buy/sell/hold decisions
3. IPOs and capital raising
Used to set a target price range when taking a company public or issuing new shares
Impacts how much capital is raised and how ownership is diluted
4. Restructuring or bankruptcy
Valuation helps decide whether the business should be sold, restructured, or liquidated
5. Strategic planning and budgeting
Companies use valuation to assess:
Whether to expand into new markets
What businesses to divest
How much value a new project could add
6. Fairness opinions
In M&A, bankers often prepare a valuation to justify that the deal is “fair” to shareholders from a financial point of view

Question 22

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

Answer 22

Valuation isn’t just about numbers — market perception, qualitative strengths, and strategic positioning can justify a premium over peers. Even if two companies have similar financial profiles, one may trade at a higher valuation due to qualitative or strategic factors that make it more attractive.
Possible reasons:
1. Strong brand or market position
The company may have greater pricing power or customer loyalty
2. Superior management team or track record
Investors may assign more value to strong leadership and execution
3. Better competitive advantages
Patents, proprietary technology, network effects, or unique distribution
4. Lower risk profile
More stable revenue, stronger balance sheet, or better cash flow visibility
5. Strategic value to an acquirer
The company may offer unique synergies or fill a gap in an acquirer’s portfolio
6. Recent positive news or momentum
Announcements, product launches, or favourable regulatory changes may drive a valuation bump

Question 23

23. What are the flaws with public company comparables?

Answer 23

1. Market fluctuations
   Valuations can be affected by short-term market sentiment, hype, or fear
   Companies may trade above or below intrinsic value for reasons unrelated to fundamentals
2. No perfect comparable
   It’s often hard to find a truly identical company in terms of:
   Size
   Growth
   Geography
   Business model
   Small differences can lead to big valuation mismatches
3. Accounting differences
   Companies may use different accounting policies (e.g. revenue recognition, capitalisation)
   This affects comparability of metrics like EBITDA or Net Income
4. Market-based, not intrinsic
   Comps reflect what the market is paying, not necessarily what a company is worth
   Susceptible to mispricing if peers are overvalued or undervalued
5. Limited relevance for private or niche businesses
   Some businesses operate in unique or specialised markets where there are few or no public comps

Question 24

24. How do you take into account a company’s competitive advantage in a valuation?

Answer 24

You can reflect a company’s competitive advantage (also known as its moat) in both quantitative and qualitative ways across valuation methods.
1. Use higher valuation multiples (in comps and precedents)
If a company has strong competitive advantages, you may justify applying a higher multiple than its peers
Example: EV/EBITDA of 12x instead of the peer median of 10x
Justified by superior:
Brand strength
Margins
Market share
Customer retention
Intellectual property
2. Adjust DCF assumptions
Higher revenue growth
Reflects strong customer demand or pricing power
Higher margins
From operational efficiency or cost advantages
Lower discount rate (WACC)
If the company’s cash flows are more stable and less risky
Higher terminal value
Based on more sustainable long-term performance
3. Use qualitative narrative
In presentations or pitchbooks, explicitly highlight:
Barriers to entry
First-mover advantages
Strong management or strategic relationships

Question 25

26. 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?

Answer 25

Yes — while precedent transactions normally include a control premium (so they tend to result in higher valuations), there are exceptions where they may produce a lower valuation than public comps. 1. Market conditions have improved since the transactions occurred Public comparables may now reflect higher multiples than past deals Especially relevant in bull markets or post-recovery periods 2. The precedent transactions were for distressed or weak companies If the deals involved turnaround targets, bankruptcies, or forced sales, the multiples may be lower than market comps 3. Strategic buyers paid very little due to a lack of competition A limited bidder process could lead to below-market prices 4. Industry-specific factors In cyclical sectors (e.g. energy, mining), timing matters — comps may be high when commodity prices are strong, even if past deals were done in downturns

Question 26

27. What are some flaws with precedent transactions?

Answer 26

Precedent Transactions are useful for establishing real-world deal values, but they rely on judgement, timing, and limited data, and should always be used in combination with other methods. 1. Market conditions may differ Past deals may have occurred in very different environments (bull or bear markets) That means the multiples may no longer reflect today’s valuations 2. Lack of truly comparable transactions Even in the same industry, no two deals are exactly alike Differences in size, geography, growth, or synergies make apples-to-apples comparisons difficult 3. Data availability is limited Many deals, especially private ones, don’t disclose full terms (e.g. purchase price, EBITDA) This can make it hard to calculate accurate multiples 4. One-off factors distort value Some deals include strategic synergies, earn-outs, or unique legal structures These may inflate or suppress the actual price paid 5. Control premiums vary Some deals involve large control premiums; others involve distressed assets with no premium at all You must adjust for context or risk skewing your valuation

Question 27

28. 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?

Answer 27

Even with identical financials and the same buyer, differences in deal structure, context, and assumptions can cause the multiples to diverge. 1. Timing differences One deal happened in a bull market, the other in a downturn Market sentiment can drive big valuation swings 2. One company had more synergies If the acquirer expects greater cost savings or revenue upside from one target, they’ll be willing to pay more 3. Different negotiation dynamics One company may have had more bidders, creating a competitive auction The other may have been a quiet, negotiated sale 4. Different accounting treatments EBITDA might be adjusted differently for each company (e.g. non-recurring items, different definitions of EBITDA) 5. Strategic value One company might hold a unique asset or capability the buyer really wanted, even if financials were the same

Question 28

29. Why does Warren Buffett prefer EBIT multiples to EBITDA multiples?

Answer 28

Warren Buffett prefers EBIT over EBITDA because he believes that depreciation is a real expense that should not be ignored. 1. Depreciation reflects real capital costs Companies must spend money to maintain and replace assets EBITDA ignores this, overstating cash flow in asset-heavy businesses 2. EBIT includes depreciation It accounts for the wear and tear on assets, giving a more realistic view of profitability 3. Buffett focuses on businesses with strong, sustainable earnings He values cash flows that are actually available to shareholders, not just theoretical figures Example: A company shows $100 million EBITDA But it spends $30 million per year on maintaining equipment (depreciation) EBITDA ignores that $30M, while EBIT reflects it

Question 29

30. The 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?

Answer 29

These three multiples measure profitability at different levels of the income statement, and each is useful in different contexts. 1. EV / EBITDA Measures profitability before interest, taxes, depreciation, and amortisation Best used for comparing companies with different capital structures and tax environments Useful for capital-light industries or when you're focused on operating performance Most commonly used multiple in general valuation 2. EV / EBIT Includes depreciation and amortisation, so it reflects a more realistic operating profit Better for capital-intensive industries like manufacturing, telecoms, and energy, where depreciation is significant Shows the impact of capital investment on profitability 3. Price / Earnings (P / E) Compares Equity Value to Net Income, so it's impacted by capital structure, taxes, and interest Used when you want to evaluate returns to shareholders Best used for mature, stable companies with consistent earnings

Question 30

32. How do you value a private company?

Answer 30

You can value a private company using the same core valuation methods as a public company — Comparable Companies, Precedent Transactions, and DCF — but you must adjust for the lack of public market data. 1. Comparable Companies Analysis Use public peers to estimate valuation multiples (e.g. EV/EBITDA, P/E) Apply those multiples to the private company’s financials Adjust downward if the private company is less liquid or has lower transparency 2. Precedent Transactions Identify past acquisitions of similar private companies Apply multiples from those deals Often more relevant than comps for private firms 3. DCF Analysis Forecast the private company’s Free Cash Flows Discount them back using WACC Be careful — inputs like cost of capital, beta, or exit multiple are harder to estimate Additional considerations for private companies: a. Illiquidity discount / private company discount b. Investors may pay less due to lack of marketability and information c. No market cap or share price d. Equity Value must be implied based on total valuation minus debt e. Limited data f. May need to rely on internal forecasts, management interviews, or audited statements

Question 31

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

Answer 31

Because public companies are more liquid and transparent than private ones, so investors pay a premium for that — and you must adjust for it. Why discount public comparables? Public companies benefit from: Daily trading liquidity Regulatory oversight Public financial reporting Market access (e.g. stock issuance) Private companies lack these features, making them riskier and less desirable to investors Therefore, when using public company multiples (like EV/EBITDA), you may apply a discount of 10–30% to reflect the illiquidity and lower transparency of the private company Why not discount precedent transactions? Precedent transaction buyers (especially strategic or private equity buyers) are usually acquiring private companies These buyers are already paying full control prices, with premiums included So no further discount is necessary — the multiples already reflect the private company context

Question 32

34. Can you use private companies as part of your valuation?

Answer 32

Yes, you can use private companies if data is available and relevant, but they’re generally less reliable than public comps and should be used as supporting evidence rather than the primary benchmark. When you might use private companies: If no suitable public comparables exist in the same industry or geography If the private companies are well-known, large, and have reliable data In Precedent Transactions, when the buyer acquired a private company — this is often the case in M&A analysis Challenges with using private companies: a. Limited data b. Private companies don’t file with regulators, so detailed financials may be unavailable or unaudited c. Inconsistent metrics d. Accounting standards may vary e. Metrics like EBITDA may be defined differently or not disclosed f. Valuation may not be market-based g. Private transactions can reflect unique, one-off negotiations rather than broad market pricing