What are the different ways you can calculate the purchase price of a company (in the context of cases)? Do you do an NPV calculation or is it more like using a multiplier for operating profit (I.e ask price = 5x Ebitda) ?
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Hi there,
Could be either of the two.
The valuation of a company can be conducted with:
- Discount Cash Flow. Discount the future cash flow of the company, normally using a perpetuity formula.
- Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
- Sum of the parts. Sum up the value of the assets of the company and subtract net debt. This is going to give the minimum price you may pay since assets are considered in isolation and it is normally not used.
If the company is listed on the stock exchange, you may also simply use the market capitalization of the company as a reference.
Hope this helps,
Francesco
Typically in investment, valuation or PE-related cases, there are a few key approaches towards valuing the purchase price of an entity:
- Multipler (x sales, x EBITDA): Helpful to get latest comps here on multiples for recent transactions
- Market cap: Helpful to get a sense of comps as well as # of shares and PPS
- NPV: Self-explanatory
If time permits, would be great if you could use more than one of the approaches listed above to triangulate an answer (NPV is a must)
Check out this one: https://www.preplounge.com/en/consulting-forum/valuation-and-ma-cases-1836
Hi there,
Most valuation cases are going to use NPV - this should be your default. The alternatives are multiplier (Ebitda times x) and market cap (# shares times share price) but you will generally be prompted/directed to calculate the value this way (i.e. given charts/data that make it clear market cap or a multiplier should be used).
Hello!
Agree with Ian, in the context of consulting, NPV is going to cover most of the cases.
Ensure that you are familiar with the normal one (in which they tell you the number of years) and the perpetuity version!
Cheers,
Clara
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