The Private Equity Toolkit

8Valuation

Key Topics in Chapter 8:

• Enterprise value, headline price and cash consideration: why they are each different
• How experienced investors use flawed valuation methods and still get to the right answer
• Seven valuation metrics and six valuation methods I like (and hate) to use
• Two valuation approaches for those times when you find “difficult to value” companies
• You've done the valuation: How much will you pay to win the deal?

Much has been written about valuation. There is an overwhelming number of valuation books and online resources already in existence—with many more in the pipeline. McKinsey alone recently contributed almost 900 pages on the topic of assessing corporate value by publishing an updated edition of its venerable valuation manual (McKinsey, 2020).¹ As you can imagine, writing something distinctive on valuation is a tall order in this context: What can I say in this chapter in order to maximize its utility for the reader? Perhaps it is best if I refrain from rebroadcasting the concepts that are already well-covered by other finance writers. Instead, I will provide my subjective—and perhaps not entirely academically accurate—view on the valuation techniques that I believe to be suitable for a private equity setting. I will describe the valuation metrics that I use most frequently and the valuation methods I rely on. Finally, I will discuss the thought process that I employ to get from the company's valuation to deal pricing.

To stick to my goal ...