Business valuation methods and formulas
There are several different ways of determining the value of a business. Below we describe four different approaches in business valuation and the formulas that can be used. In our small business valuation model and in our advanced estimate business value model we use a combination of these valuation formulas. To read more about the methods we use in those formulas follow this link on determining business value.
Discounted Cash Flow (DCF) AnalysisThe DCF model (also known as “DCF analysis” or the “DCF”) is a fundamental valuation methodology broadly used by investment bankers. The DCF has a wide range of applications, including valuation for various M&A situations, IPOs, restructurings and investment decisions. It is premised on the principle that a target’s value can be derived from the present value of its projected free cash flow. Read more about discounted cash flow analysis. |
Leveraged Buy Out (LBO) AnalysisAn LBO is the acquisition of a target using debt to finance a large portion of the purchase price. The remaining portion of the purchase price is funded with equity contribution by a financial sponsor. It is used to determine an implied valuation range for a given target in a potential LBO sale based on achieving acceptable returns. Read more about LBO analysis. |
Comparable Companies AnalysisComparable companies Analysis provides (also known as “comparable companies” or “trading comps”) a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time. It has a broad range of applications, most notably for various M&A situations, IPOs, restructurings, and investment decisions. Read more about comparable companies analysis. |
Precedent Transaction AnalysisPrecedent transactions (also known as “precedent transactions” or “transaction comps”) are premised on multiples paid for comparable companies in prior transactions. It has a broad range of applications, most notably to help determine a potential sale price range for a company, or part thereof, in an M&A or restructuring transaction. Read more about precedent transaction analysis. |
An example of a valuation output:
Source: J. Rosenbaum, J. Pearl 2008
