Investment bankers use a range of methodologies when working on valuation models, this tutorial will help you understand what the different types of methods are and when to use them. Below we take a look at the following investment banking valuations: Comparable Company Analysis, Precedent Transaction Analysis, Discounted Cash Flow Analysis, Leveraged Buyout/Recap Analysis, and others.
Graphic taken from the Investment Banking Interview Guide:
- Also known as “Public Market Valuation”
- Value based on market trading multiples of comparable companies (i.e. similar companies like Pizza Hut and Domino’s)
- Applied using historical and prospective multiples
- Does NOT include a control premium (since the companies are publicly traded, they would have to be acquired to include this)
Precedent Transaction Analysis
- Also referred to as “Private Market Valuation”
- Value based on multiples paid for comparable companies in sale transactions
- Includes control premium (since the acquirer had to pay for controlling interest in the deal)
- “Intrinsic” value of business
- Present value of projected free cash flows (FCF)
- Incorporates both short-term and long-term expected performance
- Risk in cash flows and capital structure captured in discount rate
Leveraged Buyout/Recap Analysis
- Value to a financial LBO buyer
- Value based on debt repayment and return on equity investment
Other Valuation Methods
- Liquidation Analysis
- Break-up Analysis
- Expected IPO Valuation
- Dividend Discount Model
Financial Models Available:
Discounted Cash Flow Model
Merger Model
IPO Model
Private Equity Growth Capital Model
Private Equity Training LBO