Valuation Fundamentals
The core toolkit every investment banker and PE professional uses to determine what a company is worth.
The Language of Valuation
Before diving into the models, master these fundamental metrics that appear across every deal and every pitch book.
EV/EBITDA
The most commonly used transaction multiple. Enterprise Value divided by EBITDA. A 10x EV/EBITDA means buyers pay $10 for every $1 of operating profit.
EV/Revenue
Used for high-growth or pre-profit companies. Compares total company value to annual revenue. Common in tech/SaaS where EBITDA multiples are less meaningful.
P/E Ratio
Price-to-Earnings. Market cap divided by net income. Most relevant for banking, insurance, and other financial institutions where EV-based metrics are less applicable.
IRR / MOIC
Internal Rate of Return and Multiple on Invested Capital. The primary performance metrics for PE funds. A 3x MOIC over 5 years equates to roughly a 25% IRR.
Four Pillars of Valuation
Click each method to expand a full walkthrough — including the step-by-step process, strengths, limitations, and key formulas.
DCF Analysis
Intrinsic value through discounted future cash flows
A DCF (Discounted Cash Flow) model estimates a company's intrinsic value by projecting its free cash flows over 5–10 years and discounting them back to today using a discount rate (WACC). It is the most theoretically rigorous valuation method and forms the backbone of any serious investment analysis.
Step-by-Step Process
Project Free Cash Flow (FCF)
Forecast revenue, EBITDA, CapEx, and working capital changes over a 5–10 year period. FCF = EBIT(1-t) + D&A – CapEx – ΔNWC.
Calculate WACC
Weighted Average Cost of Capital = (E/V × Re) + (D/V × Rd × (1-T)). Reflects the blended required return of equity and debt holders.
Estimate Terminal Value
Use the Gordon Growth Model [TV = FCF × (1+g) / (WACC – g)] or an exit multiple (EV/EBITDA). Terminal value often represents 60–80% of total enterprise value.
Discount to Present Value
Discount both the projected FCFs and the terminal value to today using WACC. Sum them to get Enterprise Value, then bridge to equity value.
Sensitivity Analysis
Build a sensitivity table varying WACC and the terminal growth rate (or exit multiple) to understand the range of intrinsic values.
Strengths
- ✓Theoretically sound — based on fundamental economics
- ✓Not dependent on market conditions or comparable companies
- ✓Forces rigorous analysis of operating drivers
Limitations
- ✗Highly sensitive to WACC and terminal value assumptions
- ✗Garbage in, garbage out — projections require judgment
- ✗Less reliable for early-stage or unpredictable businesses
Key Formula
Enterprise Value = Σ [FCFt / (1+WACC)^t] + Terminal Value / (1+WACC)^nLBO Model
Returns analysis for leveraged buyout transactions
Comparable Companies
Market-based valuation using trading multiples
Precedent Transactions
M&A-based valuation using historical deal multiples
The Football Field Chart
Bankers present all valuation methods side by side to show the full implied value range and where different methodologies converge.
Reading the football field: Where all four bars overlap represents the most defensible value range. In this example, the overlap zone around $58–$72 represents the strongest support for the implied valuation.
Valuation Rules of Thumb
The Magic Multiple
Control Premium
Terminal Value Weight
Valuation Multiples by Industry (2024)
Real-world trading and transaction multiples provide context for what 'expensive' vs. 'cheap' truly means in different sectors.
| Industry | EV/EBITDA Range | EV/Revenue | Key Driver |
|---|---|---|---|
| Software (SaaS) | 12–22× | 4–8× | Growth + recurring revenue |
| Telecom / Utilities | 9–12× | 0.6–1.2× | Stable cash flows |
| Healthcare | 11–14× | 2–5× | Non-cyclical demand |
| Financial Services | 8–11× | 1–2× | Capital, interest rates |
| Consumer Discretionary | 6–10× | 0.8–2.5× | Cyclicality, brand |
| Energy / Materials | 5–9× | 0.5–1.5× | Commodity pricing |
Valuation in Action: Worked Examples
See how these methods work together in a practical M&A scenario.
Example: Valuing a Mid-Market SaaS Company
Scenario:
A cloud accounting software platform with $50M ARR, 30% growth, 35% EBITDA margins, and stable customer retention.
Using Comparable Companies (EV/Revenue)
Peer median: 6× EV/Revenue (SaaS comps trade at 4–8× in 2024)
Implied Valuation = $50M ARR × 6 = $300M
Using EBITDA Multiples
$50M ARR × 35% margin = $17.5M EBITDA. SaaS median ~16× EV/EBITDA (2024 range: 12–22×)
Implied Valuation = $17.5M × 16 = $280M
Consensus Range: $280–$300M
Aligns on the convergence of revenue and EBITDA multiples. A strategic buyer might pay toward the high end ($300M+) if they see strong synergies or growth potential. Premium-growth SaaS names can still exceed these ranges.
Example: PE Perspective on the Same Deal
LBO Entry Analysis:
A PE firm evaluates a mid-market SaaS company with a 20% IRR hurdle rate and 5-year hold. Note: software LBOs often use less debt than traditional LBOs due to high purchase multiples — leverage is sized to ~4–5× EBITDA to remain financeable.
Entry Assumptions
- • Entry Price: $130M (~7.5× EBITDA)
- • Debt Financing: 60% ($78M) at ~8% interest
- • Equity Check: 40% ($52M)
- • Annual EBITDA Growth: 15%
Exit Assumptions (Year 5)
- • Year 5 EBITDA: $35.2M (15% CAGR from $17.5M)
- • Exit Multiple: 18× EBITDA
- • Exit EV: $634M
- • Debt Remaining: ~$30M (from ~$78M down via cash sweep)
- • Exit Equity Value: $604M
IRR Calculation: $52M → $604M over 5 years
IRR ≈ 63% / MOIC ≈ 11.6×
This well exceeds the 20% hurdle, so the PE firm would likely make the investment. Note: rates vary with market conditions — higher rates reduce returns by increasing interest expense.