Valuation Methods Overview Interview Questions & Walkthrough

Intrinsic valuation derives value from the cash flows or assets a company generates. The most rigorous intrinsic method is DCF — project free cash flows, discount at WACC, and calculate enterprise value. DCF is powerful for mature companies with predictable cash flows, but weak for pre-revenue companies, highly cyclical businesses, or financial institutions where cash flow definitions diverge from traditional definitions.

Relative valuation anchors to market multiples. If comparable public companies trade at 10x EBITDA, and your target has £50m EBITDA, the implied valuation is £500m. This method is fast and market-informed, but it assumes the market is rational and that true comparables exist. It's especially useful in an M&A context to benchmark deal pricing.

Asset-Based valuation is most relevant for asset-heavy businesses (real estate, infrastructure, utilities) or balance-sheet-focused institutions (banks, insurance). It calculates net asset value (assets minus liabilities at market value) or liquidation value (what assets would fetch in a forced sale). It's less useful for tech or service businesses where intangible value (brand, software, talent) isn't captured on the balance sheet.

Relative valuation derives value from market-observed multiples. The most common is EV/EBITDA. If publicly listed peers trade at 9x EBITDA and your unlisted target has £60m EBITDA, the implied EV is £540m. Other multiples include EV/Revenue (for unprofitable or early-stage), EV/FCF (for cash-generative businesses), P/E (for mature equities), and Price/Book (for asset-based businesses).

To find good comparables, look for companies in the same industry, similar scale, similar growth profile, and similar capital structure. A tech startup is not comparable to a mature telecom, even if both are "communications." The key is to adjust for differences: if your target is faster-growing than peers, apply a premium multiple; if it's less profitable, apply a discount.

Precedent transactions (M&A multiples) are especially useful in a deal context. If similar companies were acquired recently at 10x EBITDA, that's a strong reference point for your deal pricing. However, be aware of market cyclicality — valuations in 2022 were much higher than in 2023. Use multiples from recent transactions (last 2-3 years), not from 5+ years ago.

The best valuation analysis uses all three approaches and reconciles them. Start with DCF as the anchor (intrinsic value). Cross-check with comparable company multiples (market-based sanity check). Add relative value from precedent transactions (deal context). If all three point to a similar range, you're confident. If they diverge significantly, investigate why.

Example: Your target has £100m EBITDA. DCF yields £1.2bn EV. Comparable trading multiples are 10x EBITDA = £1.0bn. Precedent M&A multiples are 11x EBITDA = £1.1bn. The three methods are clustered around £1.0-1.2bn — this is a tight range and suggests a valuation of ~£1.05bn is fair. But if DCF says £800m and comps say £1.2bn, something is wrong — dig into the assumptions.

In M&A deals, you'll often see a range: "fair value is £1.0-1.2bn based on [DCF, comps, precedents]." This range acknowledges inherent uncertainty while anchoring to multiple methodologies. It's more credible than a single point estimate.