Interview preparation sheet valuation methodologies summary by Coaching Assembly

Valuation Methodologies Find more on CoachingAssembly.com Comparable company analysis 

Objective: Compare the trading and operating performance of a company to that of its peers.

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This methodology determines how the market has capitalized the earnings and cash flows of the company. Other parameters can be analyzed such as leverage and margins.

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Key Takeaways 

Comparability is key, both in terms of identity of relevant peers and in treatment of financial information across different companies. 

Be aware of the results from applying the multiple, e.g. applying a P/E multiple results in market capitalization and canno’t be compared with the enterprise value obtained by applying an EV/EBITDA multiple..

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premium or a value for synergies. y g Does not include a control p

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Interpretation of data requires familiarity with the industry and the companies involved.

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The market is not always efficient; small capitalization and thinly traded stocks may not trade actively and the share price therefore may not reflect fundamental value.

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Value drivers: 

Growth

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g Margins

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Returns

Precedent transaction analysis 

Objective: Determine the value offered in past acquisitions of similar companies.

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This methodology determines the pricing of past transactions as compared to a company’s financial performance and unaffected market value.

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K Takeaways Key T k 

Interpretation of data requires familiarity with the industry and the companies involved as there will be very specific circumstances surrounding each transaction.

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Analysis is typically based on historical data and is not forward looking.

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Control premium percentages should be applied to equity values rather than enterprise values.

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It should be noted that differences in the forecasts used by the buyer and the seller can result in different multiples.

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Selecting transactions: 

Same industry as the target business

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Relevant geography

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Background (strategic vs. financial buyer, auction vs. negotiated deal etc.)

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Si off the Size th deal d l

Valuation Methodologies Find more on CoachingAssembly.com Discounted cash flow analysis 

Objective: Calculate NPV of cash flows.

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This methodology discounts the unlevered, after-tax projected free cash flow at a company’s weighted average cost of capital to obtain an economic present value of assets. We subtract debt and other enterprise value adjustments from the present value of cash flows to derive the equity value. value Sensitivities are used to demonstrate the impact of changes in the key underlying assumptions.

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Key Takeaways 

Need realistic five to ten year projected financial statements

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Sales growth rate, margins, terminal multiples, discount rates and perpetual growth rate are key to value

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Capital structure affects value only through its impact on WACC

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DCF captures the full theoretical value of a company

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Very sensitive to terminal value, which can be quite subjective to calculate and therefore should be sensitized

Leveraged buy out (“LBO”) analysis 

Objective: b d determine the h returns available l bl to the h providers d off equity under d a leveraged l d capitall structure, assuming an eventual exit at an assumed valuation.

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This methodology models a company’s financial performance under a leveraged capital structure. We assume the transaction occurs in today’s borrowing environment and determine the maximal initial debt a company can realistically repay in a timely manner.

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We calculate the Internal Rate of Return (“IRR”) to the equity provider with an exit after 3-5 years at an assumed exit multiple. The output is sensitized to a variety of inputs including different operating and capital structure scenarios.

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Key Takeaways 

LBO analysis determines a relevant valuation for private equity acquires.

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It is also relevant for strategic acquirers as it shows what competing private equity acquirers can pay.

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Sales growth rates, margins, exit multiples and interest rates are key to value.

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LBO candidates: 

Steady and predictable cash flow

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Strong, defensible market positions

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Minimal future capital requirement

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I Incentivized ti i d managementt team t

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Viable exit strategy

Valuation Methodologies Find more on CoachingAssembly.com Sum of the Parts (“SOTP”) 

A SOTP approach is taken when valuing a company which have numerous divisions which, if standalone entities, would be valued differently.

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A SOTP valuation can be done either on a trading basis, on a transaction basis, or on a fundamental basis.

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The valuations of the different parts are added together, offset by corporate adjustments (e.g. central costs to obtain the enterprise value of the company.

Quantitative factors 

Comparable companies: relevant population

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Comparable transactions and appropriate premia

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DCF data: cash flows, WACC, terminal value

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LBO: cash flows, terminal value, capital structure, target IRR

Qualitative factors 

Quality and likely future performance of the business relative to comparable listed companies and precedent transactions

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Strategic value to an investor

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IPO market conditions and likely impact on IPO valuation

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Number, type (strategic or PE fund) and mindset of potential purchasers

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Likely availability of debt financing for potential buyers

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Contingent and other liabilities

Valuation Questions 

What are the major valuation methodologies?

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

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When would you use Sum of the Parts?

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What are the most common multiples used in Valuation?

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Would an LBO or DCF give a higher valuation?

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

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Can you use Equity Value / EBITDA as a multiple?

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How do you select Comparable Companies / Precedent Transactions?