You're navigating conflicting valuation reports in private equity. How do you secure a fair deal?

When dealing with conflicting valuation reports in private equity, it’s important to take a deep dive into the valuation methodology. First, conduct an independent audit of the approaches used: discounted cash flow, multiples, and market comparisons. Analyze each party’s assumptions and forecasts, especially around revenue growth and margins. Then, consider macroeconomic conditions and industry trends that could impact valuation. Build a negotiating strategy based on reasonable adjustments and scenarios. Bring in an outside expert to provide final verification and agree on a consensus valuation.

In private equity, handling conflicting valuation reports requires strategic negotiation and validation. Conduct a thorough analysis using multiple valuation methods, such as DCF and comparables. For instance, Warburg Pincus navigated a deal involving a tech startup, facing valuation discrepancies between reports indicating $1.5 billion and $2 billion. They agreed on a $1.75 billion valuation, combining earnings projections with market trends. This middle ground was supported by an agreement on performance-based payouts to adjust the final price based on future earnings. Such approaches ensure fairness, tying final valuation adjustments to actual performance metrics.

The valuation methods are complements in my opinion. Using comps can give Investors a great quick overview. While a detailed DCF will always take more time to build and rely heavily on assumptions, the valuation estimate can be a lot more precise. Especially if cash flows are more predictable the quality of the DCF model will be higher.

The starting point will be the valuation methods then make a apple to apple comparison. 1. If Comparable companies approach is taken then the check points will be comp set, period for which the share prices are considered, whether the financial ratios are for the same period. 2. If DCF is approach is taken then the starting point is the free cash flow. Then compare each header such as Capex, EBITDA, working capital, etc. Post this, the analyst should give his/ her view on what should be the correct assumption in the given context

Especially numbers that can be altered via accounting methods like quarterly earnings should really be compared to the actual cash flows to achieve a more reliable view of the profitability of a company. While some numbers involve a lot of estimation (e.g. future growth rates), current cash flows show an unadorned picture of the present.

That’s correct, especially when it comes to forecasting the working capital assumptions (porter’ five forces model) will help you in this. In terms of forecasted CAPEX, analyze the current situation of the company’s PPE whether it still new or it needs to be replaced soon, and reflect this in your model to be fair in forecasting the FCF.

That’s correct, but try to avoid the confirmation bias, ask more than one experts, and read more about the industry to form your own opinion.

Taking the current market into account is important especially if investors want to estimate how easily a position can be sold. As you can see in the current environment: During lower interest rates the valuations were pretty elevated, and while the valuations within some funds are still high, trying to sell private assets in this current stressed environment really shows the true market value of those assets.