Resource
Business valuation guide
A practitioner guide to how private businesses are valued: discounted cash flow, trading comparables, precedent transactions, the enterprise-to-equity bridge, and the questions to ask when reviewing a valuation conclusion.
01
What a valuation is actually answering
A valuation is a conclusion about value under a stated basis, at a stated date, for a stated purpose. The same business can carry different values for a strategic acquirer, a financial sponsor and a minority shareholder, because each is buying a different set of cash flows and rights. Naming the basis of value and the purpose before selecting a method prevents most of the disputes that arise later.
In transaction work, the valuation is rarely a single number. It is a range produced by more than one method, with the drivers of the range made explicit. A credible analysis shows where the methods agree, where they diverge, and which assumption is doing the work.
Basis of value
Market value, fair value, investment value or fair market value — each carries different assumptions about the hypothetical buyer.
Valuation date
Value is a point-in-time conclusion; subsequent events are disclosed but generally not built into the number.
Level of value
Control versus minority, marketable versus non-marketable, and whether premiums or discounts are appropriate.
Purpose
Transaction negotiation, fundraising, financial reporting, tax, litigation or internal planning.
02
Discounted cash flow
A DCF values a business on the present value of the free cash flow it is expected to generate. It is the most assumption-sensitive method and the most informative, because it forces every driver of value to be stated explicitly: growth, margin, working capital, capital expenditure, tax and the cost of capital.
The quality of a DCF is determined by the quality of the forecast, not the elegance of the model. Forecast cash flows should reconcile to the operating build, the exit or terminal assumption should be sanity-checked against implied multiples, and the discount rate should be documented component by component.
Free cash flow
EBITDA less cash taxes, capital expenditure and working capital movements, on an unlevered basis for enterprise value.
Explicit forecast period
Long enough to reach a normalised, steady-state level of growth, margin and reinvestment.
Discount rate
WACC built from a risk-free rate, equity risk premium, beta, size and specific-risk adjustments, and an after-tax cost of debt at target gearing.
Terminal value
Gordon growth or exit multiple; cross-check the implied multiple of one against the implied growth of the other.
Sensitivities
A grid across discount rate and terminal growth, plus scenario cases on the two or three operating drivers that move value most.
03
Trading comparables
Trading comparables value a business against the multiples at which similar listed companies trade. The method reflects current market sentiment and is quick to update, but its usefulness depends entirely on whether the comparable set is genuinely comparable — in business model, growth, margin, capital intensity and end-market exposure.
Multiples must be calculated on a consistent basis. Enterprise value multiples pair with pre-interest metrics such as EBITDA, EBIT or revenue; equity value multiples pair with post-interest metrics such as net income. Mixing the two is the most common error in comparable analysis.
Screening
Select on business model and financial profile, not sector label alone; state why each company is in or out.
Normalisation
Adjust comparable metrics for exceptional items, lease accounting and calendarisation to a common year end.
Metric choice
EV/EBITDA for most established businesses, EV/Revenue for early-stage or loss-making, EV/EBIT where capital intensity differs.
Application
Apply the range to the subject's own normalised metric — the same adjusted EBITDA the diligence workstream supports.
Discounts
Consider size, liquidity and marketability differences between listed comparables and a private subject.
04
Precedent transactions
Precedent transaction analysis values a business against multiples paid in completed acquisitions of similar companies. Because transaction prices include a control premium and, frequently, expected synergies, this method typically produces a higher range than trading comparables. That gap is informative rather than a problem: it indicates what acquirers have historically paid for control.
The limitations are data quality and timing. Private deal terms are often incomplete, earn-outs and deferred consideration may not be reflected in the headline multiple, and transactions from a different market cycle can mislead. Each precedent should carry the date, the disclosed consideration structure and the source.
05
From enterprise value to equity value
Most methods produce an enterprise value. What a shareholder receives is equity value, and the bridge between them is where a significant portion of negotiated value is won or lost. The bridge should be consistent with the earnings definition used in the valuation and with the diligence findings on net debt and working capital.
Deduct debt
Bank debt, overdrafts, shareholder loans, accrued interest and lease liabilities where treated as financing.
Add cash
Net of restricted, trapped or minimum operating cash that is not available at completion.
Debt-like items
Earn-outs, deferred consideration, unpaid capex, accrued bonuses, pension deficits and identified tax exposures.
Working capital adjustment
The difference between completion working capital and the agreed normalised peg.
Equity instruments
Options, warrants, preference shares and any liquidation preference affecting distribution to ordinary shareholders.
06
Reviewing a valuation
A valuation should be reviewable by someone who did not build it. Every input should be traceable to a source, every method should carry a stated weighting rationale, and the concluded range should be defensible against a challenge on any single assumption.
Internal consistency
Do the DCF's implied exit multiple and the comparable range tell the same story? If not, is the divergence explained?
Forecast credibility
Is the plan consistent with historical performance, or does it assume a step change with no supporting evidence?
Cross-check
Does the implied multiple on current-year and forward earnings sit within a defensible range for the sector and size?
Sensitivity discipline
Which two assumptions drive the range, and how wide is the value under a reasonable downside on each?
Documentation
Can each source, screen and adjustment be reproduced from the workbook without the author present?
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