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Valuation Multiples (multiples)

Comparable Companies Analysis (comparable-companies)

A company can be separated into its operating businesses or assets and its non-operating
assets. Operating assets are typically the principal sources of a company's revenues, cash flow,
and income. The valuation of operating assets can be done using two different fundamental
concepts: a liquidation value and a going concern value. Most of the analysis in investment
banking and private equity contemplates valuing a business as a going concern, though
liquidation valuation is used occasionally, especially when considering distressed companies.
In the liquidation scenario, which is often used in the context of a distressed sale or a
restructuring, each asset or small collection of assets of the company is valued independently.
This is done when there is little perceived premium for holding these assets collectively.
Examples could include a collection of steel mills that may have value on an individual basis but,
due to over-capacity in the industry or regional overlap, may not attract interest from a buyer on
a combined basis.

(/macros)

Generally, the most common types of valuation seek to determine a going concern value, in
which the company being valued is assumed to continue to operate for the foreseeable future.
Note that this is the basis upon which auditors typically give their opinions. In this case, the
objective is to value the earnings power and cash generation capability of the collection of
assets that make up the operating business, as well as any non-operating or intangible assets or
attributes that are owned by the company. Non-operating assets may include interests in other
companies, while intangible assets may include trademarks, brands, customer and supplier
relationships, technology and know-how, infrastructure and systems, management expertise
and experience, etc. In most cases, the going concern value exceeds the liquidation value,
because the collection of assets produces a greater return when pooled in an operating
business than when separated in a liquidation scenario.
When valuing a company, three techniques are commonly used: comparable company analysis
(or "peer group analysis", "equity comps", " trading comps", or "public market multiples"),
precedent transaction analysis (or "transaction comps", "deal comps", or "private market
multiples"), and discounted cash flow ("DCF") analysis. A fourth type of analysis, a leveraged
buyout ("LBO") analysis, is often used to estimate the amount a financial buyer would pay for a
company. A fifth type of analysis, a sum-of-the-parts ("SOTP" or "break-up") analysis may be
used to value a company as the sum of the values of its composite businesses.
Method
Comparable
Companies
Analysis

Description
Calculates a "fully distributed"
trading value
Estimates a company's implied
value in the public equity markets
through an analysis of similar
companies' trading and operating
metrics
Apply multiples derived from
similar or "comparable" publicly
traded companies to a company's

Comments
Reliability depends on the level of
comparability of the selected
publicly traded companies
Does not include a "control
premium" (though a change of
control premium may be applied
to the equity value to estimate a
private market value)

Also in this Section

Enterprise Value (enterprise-value)
Valuation Multiples (multiples)
Comparable Companies Analysis (comparablecompanies)
Precedent Transactions Analysis (precedenttransactions)
Discounted Cash Flow (DCF) Analysis
(dcf/overview)
Leveraged Buyout (LBO) Analysis (lbo/overview)
Premiums Paid Analysis (premiums-paid)
Sum-of-the-Parts (SOTP) Analysis (sotp)

Excel Shortcuts PDF

(/ExcelShortcuts.pdf)

operating metrics (recognizing

that no two companies are exactly
alike)
Precedent
Transaction
Analysis

Provides a private market

benchmark in a change of control
scenario
Apply multiples derived from
similar or comparable precedent
M&A transactions to a company's
operating metrics
Includes a control premium

Reliability depends on the

number of precedent
transactions and their levels of
comparability
Market cycles and volatility may
affect market historical valuation
levels
Individual buyer synergies and
structure of transaction will also
impact multiples

DCF Analysis

Project the company's future

unlevered cash flows and
calculate the present value of
those cash flows and the terminal
value using an appropriate cost of
capital and terminal value
methodology

This analysis is heavily

dependent on cash flow and
growth characteristics of the
company and the terminal value
assumptions
Appropriate capital structure
reflected in valuation analysis
through discount rate
Typically the highest result of the
three methods

LBO Analysis

Determines the range of prices

that a financial buyer would be
willing to pay for a company based
on target rates of return to equity
(IRRs) and a leveraged capital
structure

This analysis is heavily

dependent on the cash flow
profile of the asset, its
leveragability, and the exit value
assumptions

Ability-toPay (ATP)

Solves for the maximum price that

a strategic buyer can pay for the
target while holding fixed one or
more financial constraints, such as
breakeven accretion/dilution in
Year 2, IRR > 15%, etc.
Used to compare the abilities to
pay of several potential acquirers,
and establish which can pay the
highest price

This analysis is heavily

dependent on the assumed
synergies, which vary from
acquirer to acquirer and involve a
lot of guesswork
Generally a more useful analysis
the more similar potential
acquirers' business models are
(e.g. banking sector)

SOTP
Analysis

Provides a range of values for a

company's equity by summing the
values of its individual operating
segments to arrive as the total
firm value
Apply multiples derived from
comparable publicly traded
companies to the operating
metrics of each operating unit
Often used to make a case for the
divestiture of one or more
businesses

Reliability depends on the level of

comparability of the selected
publicly traded companies
Does not value synergies of the
combined business
Impossible when financial
metrics of operating subsidiaries
or divisions are not available

Valuation Multiples (multiples)

Comparable Companies Analysis (comparable-companies)

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2 comments 10 months ago

2 comments 7 months ago

Chen Thanks for this which is very

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1 comment 9 months ago

Parandeep Chawla Very nicely

Operating Model
8 comments 10 months ago

Markman Capital this is a fantastic

model...

explained...

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