An Overview of Valuation Techniques

Introduction

Direct takeaway: pick DCF for intrinsic value, comps for market context, and precedents for control deals. You're valuing a company for investing, M&A, or reporting, so this map focuses on the practical methods you'll use day-to-day. Use DCF (discounted cash flow) to convert forecasted free cash flow into an intrinsic price, use comps (comparable companies) to see how the market currently prices similar businesses, and use precedents (precedent transactions) to anchor deal multiples and control premiums. One-liner: match method to purpose, data, and time horizon - quick, practical, and defintely usable.

Key Takeaways

• Pick the method to fit the purpose: DCF for intrinsic value, comps for market context, precedents for control/deal pricing.
• DCF = forecast free cash flow discounted by WACC; it's company-specific but highly sensitive to terminal assumptions and discount rates-use sensitivity tables.
• Comps use peer multiples (EV/EBITDA, P/E, EV/Revenue) with adjustments for one-offs and accounting differences; best as a market sanity check.
• Precedent transactions reveal control premiums and deal-market pricing but require adjustments for timing, synergies, size, and deal structure.
• Triangulate: adjust financials, run sensitivities, produce a DCF base case plus high/low scenarios, a comps-derived range, and a precedent memo to form a defensible valuation band.

Discounted Cash Flow (DCF)

You're valuing a company for investing, M&A, or reporting; below is a practical, step-by-step DCF you can run and defend.

One-liner: DCF finds intrinsic value by forecasting free cash flow and discounting at a justified WACC.

Explain DCF: forecast free cash flow, discount at WACC

DCF projects a company's future free cash flows (FCF) and converts them to today using the weighted average cost of capital (WACC), which reflects the blended cost of equity and debt. The basic flow: forecast revenue → margins → cash taxes → add non-cash charges → subtract capex and working capital changes → get FCF each year → discount those FCFs and the terminal value back to present.

Concrete steps you should follow:

• Pick a 3-10 year explicit forecast horizon
• Build a bottoms-up revenue and margin model
• Compute NOPAT (net operating profit after tax)
• Add back D&A, subtract capex and ΔNWC to get FCF
• Estimate terminal value, then discount all to present with WACC

Best practice: document every assumption (sources, ranges, and where you used industry averages). One clean line: get the cash flows right first; discounting is math, not magic.

Key inputs: revenue growth, margins, capex, NWC, terminal value

Key inputs drive valuation sensitivity. Treat each as a mini-model with drivers and checks.

• Revenue growth - use product, market share, and pricing drivers, not historical alone
• Margins - separate gross, EBITDA, EBIT, translate to NOPAT with realistic tax rate
• Capex - tie to capacity and revenue (e.g., percent of sales or per-unit capex)
• NWC (net working capital) - model as % of revenue with explicit ΔNWC each year
• Terminal value - use Gordon growth (perpetuity) or exit multiple; justify g under long-run GDP + inflation

Checklist and best practices:

• Adjust historicals for non-recurring items before projecting
• Explicitly forecast D&A from fixed assets schedule
• Cap WACC inputs: risk-free rate, ERP, beta, cost of debt, tax rate
• Cap terminal growth to a realistic 2-3% range for developed markets
• Stress-test every input by ±100-300 bps or plausible ranges

One clean line: if growth assumptions exceed

Relative Valuation: Comps and Multiples

Explain comps and how to compute core multiples

You're checking market sentiment and need a quick, comparable market price; comps (comparable companies) put your target in context so you can see what investors pay for similar businesses.

Start by defining the peer universe: similar industry, scale, growth profile, and geography. Then compute enterprise value (EV) and equity value, and the common multiples: EV/EBITDA, P/E (price-to-earnings), and EV/Revenue.

Steps to calculate core items:

• Get market cap (shares outstanding × share price).
• Add total debt and subtract cash to get EV.
• Use reported EBITDA or normalized EBITDA for EV/EBITDA.
• Use net income (after minorities) for P/E.
• Use revenue for EV/Revenue.

Example (illustrative): EV = $2,500m, EBITDA = $250m → EV/EBITDA = 10x. One-liner: pick EV/EBITDA for capital-structure-neutral comparisons.

Input needs and adjustments for reliable multiples

You'll only get sensible comps if inputs are clean and comparable; raw reported numbers often hide one-offs and accounting differences.

Critical inputs and how to adjust them:

• Use the latest 12-months (LTM) financials or fiscal-year (FY) numbers-match the period across peers.
• Adjust EBITDA and net income for one-time items (restructuring, asset sales) to produce normalized margins.
• Capitalize or add back operating leases (IFRS 16/ASC 842) to align EV and EBITDA bases.
• Adjust for pension deficits, minority interests, and associate earnings if material.
• Convert currencies and accounting standards where needed; use constant-currency LTM growth for comparability.

Best practices: document every adjustment in a reconciliaton schedule; use median and interquartile ranges rather than single outliers. One-liner: fix the inputs first, the multiples follow.

Strengths, limits, and the practical use-case

Comps are market-reflective and easy to explain-investors get them fast-but they're noisy and can mislead if you ignore differences in growth, margins, or accounting.

Strengths and practical advantages:

• Reflect current market pricing and sentiment.
• Quick to compute and simple to communicate to stakeholders.
• Good for benchmarking and setting a market-implied valuation range.

Limits and risks to watch:

• Market noise and short-term sentiment can inflate multiples.
• Sectors with cyclicality distort LTM multiples-use cycle-adjusted metrics.
• Different accounting rules (leases, revenue recognition) create apples-to-oranges numbers.
• Sparse or stale comps give misleading signals-update the peer set frequently.

How to use comps with other methods: run comps to create a market-implied range, then sanity-check your DCF. Quick math: apply 25th/median/75th multiples to your target metric-e.g., EBITDA $200m × 8x/10x/12x → EV range $1,600m / $2,000m / $2,400m. What this hides: synergies, control premiums, and growth expectations-so triangulate across methods.

One-liner: use comps for market reality checks, but reconcile them to company-specific forecasts-defintely document every judgment and adjustment.

Precedent Transactions and Control Premiums

You're pricing a possible sale, takeover, or advising on an acquisition and need market evidence of what buyers actually paid for control. Direct takeaway: use precedents to show the market for control, adjust each deal for timing and synergies, and reconcile the implied premium to trading comps and your DCF.

One clear rule: precedents tell you what buyers did, not what they should have done.

Explain how to analyze precedent transactions

Start by extracting the deal economics: purchase price, implied enterprise value (EV), equity value, net debt at closing, and implied per-share price. Use the acquirer's Form 8-K, S-4, press releases, and databases (Capital IQ, Bloomberg, PitchBook) as primary sources for those numbers.

Step-by-step:

• Pull announced purchase price and closing adjustments.
• Compute implied EV = equity value + net debt + minority interest.
• Derive implied multiples: EV/EBITDA, EV/EBIT, P/E on last-twelve-months (LTM) and forward figures.
• Compare implied per-share price to the unaffected market price (use 30‑day VWAP before deal rumor).

One-liner: precedents convert deal headlines into comparable multiples and implied premiums.

Adjust for timing, size, synergies, and financing; strengths and limits

Adjust each precedent to make it apples-to-apples. Timing: move older deals to current terms by noting index re-rates or sector multiple drift. Size: large-target premiums can differ-scale often raises multiples for strategic buyers. Synergies: back out estimated synergies where possible so the multiple reflects the target as a standalone business.

Practical checklist:

• Normalize the base EBITDA for one-offs and pro-forma synergies.
• Remove buyer-specific caps or earn-outs from headline price.
• Recompute multiples on pre-synergy figures.
• Adjust for financing effects-high leverage can inflate IRR-driven prices.

Strength: precedents show actual takeover pricing and typical premiums; Limit: deals are sparse and often driven by unique strategic motives, so they can mislead if taken raw. Be explicit about what you removed and why-defintely document every adjustment.

One-liner: clean the headline price before you lean on it-otherwise you're comparing apples to takeover-specific oranges.

Combine precedents with comps to justify premium or discount

Compute the implied control premium as (deal per-share price - unaffected market price)/unaffected market price and present it alongside trading comps multiples. Typical market heuristics: many control premiums cluster in the 20-40% range, but sector cycles and deal timing move that window.

How to use both sets of evidence:

• Show trading multiple median and the deal multiple side-by-side.
• Translate the delta into a percentage premium and explain drivers (synergies, buyer scarcity, regulatory path).
• Run sensitivity tables: premium versus implied standalone value under low/med/high synergy assumptions.
• Produce a short precedent memo that lists adjustments, sources, and a recommended premium range for negotiations.

One-liner: precedents justify a negotiation band; comps set the market floor/ceiling-reconcile both into a defensible range and memo the assumptions.

Asset-based and Sum-of-the-Parts (SOTP)

Explain asset-based valuation: tangible and intangible assets less liabilities

Direct takeaway: asset-based valuation estimates the net realizable value of a company by revaluing assets to market and subtracting liabilities-it produces a conservative floor for equity value.

Steps to run an asset-based valuation for fiscal year 2025

• Pull the FY2025 balance sheet and supporting schedules
• Revalue tangible assets: get recent appraisals for real estate, adjust PPE for replacement cost or market comparables
• Adjust working capital: apply realistic collectibility and slow-moving inventory haircuts
• Value intangibles: use replacement cost or an income approach (royalty or relief-from-royalty) for patents/trademarks
• Treat goodwill conservatively: test for impairment and apply write-downs if support is weak
• Include off-balance items: capital leases (finance leases), operating lease capitalized PV, pension deficits, and contingent liabilities
• Net asset value = Adjusted Assets minus Adjusted Liabilities

Illustrative FY2025 example (fictional, for method only): adjusted assets = cash $200m + receivables (collectible) $143m + inventory $108m + PPE (market) $945m + intangibles (patents) $120m + goodwill (post-impairment) $300m = $1,816m; adjusted liabilities = debt $700m + leases PV $80m + pension deficit $40m + other $60m = $880m; net asset value = $936m.

Best practices and cautions: use third-party appraisals for large tangible assets, document market assumptions, and defintely disclose discount rates and haircut percentages; note that asset-based values usually understate going-concern upside.

When to use asset-based approaches: uncertain cash flows, holding companies, real estate, insolvency

Direct takeaway: pick asset-based rules when future cash flows are unreliable or when assets themselves are the principal source of value.

When this fits

• Holding companies with dormant operating cash flows
• Real estate-heavy firms where property market value dominates
• Distressed or insolvency situations where liquidation is realistic
• Regulated utilities or mineral assets where recoverable reserves and titles drive value

Practical steps and haircuts for FY2025 analysis

• Obtain market appraisals dated within 12 months of the FY2025 balance sheet
• Define scenarios: orderly sale (lower haircut) vs forced liquidation (higher haircut)
• Apply conservative haircuts by asset class: receivables 10-30%, inventory 20-60%, PPE 30-60%, intangible 50-90%, goodwill 100%
• Include transaction costs and taxes: assume 5-25% selling costs on heavy assets
• Run a liquidation sensitivity table to show value at multiple haircut levels

Illustrative FY2025 liquidation case (fictional): starting adjusted assets $1,816m; apply liquidation haircuts -> receivables 20% ($114m), inventory 40% ($64.8m), PPE 50% ($472.5m), intangibles 80% ($24m), goodwill 100% ($0m); total liquidation recoverable ≈ $875m; after liabilities $880m this implies close to zero residual equity-useful to flag downside for creditors and equity.

Limitations and controls: verify title/encumbrance searches for real estate, confirm intellectual property ownership, and avoid overstating asset salability-marketability matters more than book value.

SOTP: value separate business units, then aggregate

Direct takeaway: SOTP (sum-of-the-parts) values each operating unit with the most appropriate method, then aggregates to an enterprise and equity number-best when businesses are heterogeneous.

Step-by-step SOTP workflow for FY2025

• Identify all reportable segments and legal subsidiaries per FY2025 filings
• Choose valuation method per unit: DCF for high-growth units, comps for mature ones, asset-based for property-heavy units
• Value minority stakes and apply marketability/discounts where needed
• Allocate corporate overhead and central costs (either fixed allocation or incremental-cost approach)
• Sum segment enterprise values, add corporate assets (cash, investments), subtract net debt and non-controlling interests to get equity value
• Run per-share calculation using FY2025 shares outstanding and sensitivity on key segment multiples or terminal growth rates

Illustrative FY2025 SOTP example (fictional): Segment A (software) DCF value $1,200m; Segment B (manufacturing) comps EV $600m; Segment C (real estate) asset-based value $300m; aggregate EV = $2,100m; less corporate net debt $400m = equity value $1,700m; divided by shares outstanding 85m => implied price $20.00 per share.

Best practices and pitfalls: keep valuation dates aligned to FY2025, avoid double-counting cash or intra-group receivables, disclose segment-specific assumptions, and explicitly model intercompany synergies separately rather than folding them into each segment; SOTP can miss combined-entity premium so explain any synergy rationale when recommending a control premium.

Action: Finance - prepare FY2025 SOTP workbook and asset revaluation schedule; Strategy - vet segment assumptions; you - approve final inputs by Friday.

An Overview of Adjustments, Sensitivities, and Choosing the Right Method

Adjust financials for one-offs, leases, pensions, and minority interests

You're reconciling accounting reports into an investable cash-flow view so the model reflects economic reality before valuation.

Start with these concrete steps:

• Remove non-recurring items - restate EBITDA and tax‑able income for FY2025 to exclude one-time gains/losses.
• Capitalize operating leases per ASC 842/IFRS 16 - add lease liabilities to enterprise value and add back related ROU (right-of-use) assets to fixed assets where appropriate.
• Adjust for defined‑benefit pensions - show underfunded deficits as debt-like items; add service cost and expected return adjustments in operating line items if they materially affect EBIT.
• Allocate minority (non‑controlling) interests - remove their share of EBIT/FCF and show minority interest as a claim on equity value.
• Normalize taxes - use a forward-looking effective tax rate (ETR) for FY2025 based on statutory rate plus permanent adjustments.

Practical checklist: 1) create an adjustments schedule, 2) roll adjustments into LTM (last twelve months) and FY2025 projections, 3) footnote judgment calls (e.g., recurring restructuring spend).

One-liner: clean, consistent pro forma financials are the single best predictor of valuation accuracy.

Run sensitivity analysis on growth, margins, capex, and discount rates; show ranges

Build a sensitivity matrix so you can see how valuation moves with the key levers instead of trusting a single-point estimate.

Follow this practical approach:

• Pick ranges: revenue growth +/- 200 basis points, EBITDA margin +/- 200 basis points, capex +/- 20%, discount rate +/- 100-200 basis points.
• Run a two-way table: growth on rows, WACC (discount rate) on columns; populate with EV or equity value.
• Report three cases: base (management), conservative (- scenario), aggressive (+ scenario); always include a stress case (low growth, higher WACC).
• Document what each case changes in assumptions - e.g., FY2025 capex cut reduces FCF but may increase long-term risk.

Example (hypothetical FY2025 company): start FCF $45.0m, 5% short-term growth to Year 5, terminal growth 3.0%, base WACC 8.5%. Here's the quick math (perpetuity terminal at year 5):

Widening WACC shows sensitivity: at 7.5% EV ≈ $1,123m; at 9.5% EV ≈ $777m. What this estimate hides: assumptions on margin recovery, working capital timing, and the chosen terminal mechanics.

One-liner: always present a grid - decision-makers respond to ranges, not points.

Choose method by objective and watch common pitfalls

Pick the tool that answers the question you actually have: valuation purpose drives method, data, and timing.

• Use DCF (discounted cash flow) for buy-and-hold investors or intrinsic-value work where company-specific forecasts matter.
• Use comps (relative multiples) for market timing or to show where the market currently prices similar risk - use LTM and FY2025 consensus numbers.
• Use precedent transactions when advising on M&A or control sales - precedents capture takeover premiums and transaction structure differences.

Common, costly mistakes - avoid these:

• Overly optimistic top‑line and margin drivers - cap upside and stress-test customer concentration.
• Stale or mismatched comps - use peers with similar size, growth, and FY2025 operating leverage; avoid comps older than 12 months unless market structure is unchanged.
• Ignoring liquidity and financing constraints - small float or covenant risk can materially lower achievable sale price.
• Mixing enterprise and equity metrics incorrectly - be explicit when you convert EV to equity value (subtract net debt, minority interest, add cash).

How to reconcile: triangulate DCF, comps, and precedents; form a defensible range and explain the drivers you trust most. For example, if DCF midpoint is $920m, comps-implied EV range is $800-1,000m, and precedents suggest a 20-30% control premium, state why you weight each input.

One-liner: triangulate-use multiple methods, reconcile into a defensible range.

Next step: Finance - draft the FY2025 DCF base case and a sensitivity grid by Friday; Strategy - validate key FY2025 assumptions; you - sign off on the final ranges.

Valuation close-out actions (post‑FY2025)

Action: build the DCF base, plus high/low scenarios, and a comps market range

You're closing FY2025 and need a defensible valuation to present to investors or the board; start by anchoring on actual FY2025 reported numbers and move to transparent scenarios.

One-liner: produce a DCF base case, a bear/bull sensitivity, and a comps-derived market range.

Steps to follow:

• Use FY2025 as the operating base-actual revenue, EBITDA, capex, and working capital from audited statements.
• Forecast an explicit horizon of 5 years (FY2026-FY2030), then a terminal value; common terminal growth bounds: 1.5%-3.0%.
• Set a base discount rate (WACC) using FY2025 market inputs (cost of equity from CAPM, cost of debt post-tax). Typical base guidance: 8.5% with sensitivity ± 200 bps.
• Build three scenarios: base (management case), low (-25% growth / +100 bps WACC), and high (+25% growth / -100 bps WACC).
• Document assumptions and sources for FY2025 inputs so reviewers can trace each number back to the financials or market data.

Deliverables: model files, sensitivity tables, comparables set, and precedent memo

One-liner: ship a runnable DCF, a sensitivity matrix, an ordered comps list, and a precedent-transactions memo that cites FY2025 deal multiples.

What to include and how to present it:

• Deliver a model workbook with separate tabs: inputs, FY2025 historical P&L/balance sheet, projections, discount schedule, and terminal calculations.
• Provide a sensitivity table that cross-tabulates terminal growth (rows: 1.5%-3.0%) and WACC (cols: 6.5%-10.5%); highlight the base cell.
• Attach a comps pack: peer selection rationale, FY2025 multiples (EV/EBITDA, P/E, EV/Revenue), and adjustments for non-recurring items.
• Draft a precedent-transactions memo listing comparable FY2025 deals, deal EV, implied EV/EBITDA, control premium, and adjustments for timing or size.
• Include an assumptions appendix that links each figure to an FY2025 source (10‑K/10‑Q, management reports, market data) and flags any judgment calls.

Owner: who does what and the approval flow

One-liner: Finance builds and numbers, Strategy tests the logic, and you sign off the final inputs and ranges.

Roles, deadlines, and final approval:

• Finance - build the DCF workbook, comps spreadsheet, and sensitivity tables; deliver first draft within 7 business days using FY2025 audited figures.
• Strategy - validate key drivers (market growth, margin outlook, capex intensity) and provide written sign-off or alternative scenarios within 3 business days of receiving the model.
• You - review assumptions, challenge outliers, and approve the final base/low/high cases; final approval due 2 business days after Strategy sign-off.
• Governance - attach the comparable set and precedent memo to the board pack; flag any liquidity or one-off risks found in FY2025.
• Next step (owner): Finance - publish the model and sensitivity table to the shared data room by end of week (Finance: publish by Friday).