How do you choose the right valuation method for an asset?

Multiples analysis is a helpful way to value a business. However, you would need to very similar transactions or publicly listed companies: Similar business/ revenue model, margins and KPIs, geography, client base, market position etc. On top of this, the similar transaction you identify should have taken place, ideally in the same year but not 5 years ago. Therefore, the usual way to run multiples analysis is to collect at least 10 transactions or publicly listed companies and take the median of their relevant multiples.

First it's important to understand the consistency of its revenue streams because what you are buying are those income streams. Then a few questions to ask are: 1. What regulatory risks are there ex: Rising rates, local taxes etc. 2. Since we focus on banks we need to know about their loan portfolio, their deposit costs, the duration of their bond portfolio, and the history and experience of their management team. 3. The geography is also important because some states have money outflows and (if you are skating to where the puck is going) you want to be where the money is flowing to.

The multiples need to be adjusted with the moving average factor. For example: P/E should be changed into MA20-P/E. The moving average multiples will capture not the screenshot but the whole period. Then, the spike will no longer affect the comparison. However, we should consider the free-float proportion of the stock and the shareholder structure to reduce the risk of market price manipulation.

Examine the risk in maintaining or growing income streams, competitors that may bight into potential income streams. So many variables! Find an expert Valuer of similar assets. Refer to Australian Property Institute for a guide to suitable Valuers.

Precedent transactions is useful in the middle market to set the range of expected multiples (specifically TEV / [EBITDA, Revenue, ARR, etc.]) for a given transaction. While no two companies are exactly alike, companies are unlikely to deviate wildly from their respective industry average (assuming similar size and margins). Many factors influence whether a company comes in at the upper or lower end of this range, including significant IP, software capabilities, geographic exposure, end market exposure, identified / identifiable avenues of growth, historic growth profile, customer "stickiness" and other differentiating points. Synergies with acquirers will also play an important factor to determine final valuation.

In my experience, investment banks and VCs often prefer the First Chicago Valuation Method (FCVM) over the traditional DCF method. This is because the FCVM offers a more robust framework for assessing the value of companies operating in dynamic and uncertain environments. By taking into account a range of scenarios and assigning probabilities to each, it provides a clearer picture of potential outcomes, helping investors make more informed decisions. There are, however, drawbacks to this method, since different analysts may assign different probabilities to scenarios, leading to different valuations. However, for companies navigating uncertain terrain, the FCVM is an effective valuation method.

Defining a discount rate for the future cash flows is quite challenging because to a certain degree it is subjective. For example, you may want to take the geopolitical risk into account by adding a risk premium. As a rule of thumb, for a moderate risk, you can add 2 pct. points to the discount rate. However, there is no definite calculation of such risk. Therefore, the discount rate could be subjective.

Generally asset based valuations are used for brick and mortar companies for valuation of individual assets or group of assets. If one uses Replacement Cost Analysis (in asset based valuation method) properly then many a times s/he would realise that the value arrived by this method is same as that of Market based method. If the current use of the assets is highest and best use then it could even match the income based method. If the valuations by using all the three methods are different then some external factors such as economical / functional obsolescence could be there or the assets are not getting used at their Highest & Best Use (HABU).

The three primary valuation methodologies in investment banking are trading comps, transaction comps, and discounted cash-flow analysis. There are other valuation methodologies as well such as a sum-of-all-parts analysis, merger models, and leveraged buy-out analysis. Which methodology you utilize will depend upon the type of transaction that is taking place. In most cases you will want to utilize several at a time and lay them on top of each other in a football field analysis. The key to a great valuation is to understand the type of deal you are working on and making the correct assumptions when you building out a financial model. Remember that financial models are sensitive to assumptions regarding WACC and growth rates.