4 ways to value a vompany — and which is highest

Valuation is never a single number. It depends on the method you use, the assumptions you make, and the type of buyer you are. In M&A, four methods dominate: DCF, comparable companies, precedent transactions, and LBO. Each one has its place—and its own logic.

The four most common valuation methods are DCF, comparable companies, precedent transactions, and LBO. Among these, precedent transactions usually result in the highest valuation due to control premiums and synergies. The LBO results in the lowest valuation due to minimum return requirements.

Here’s how they work, when to use them, and why they yield different results.

1. DCF: Intrinsic value based on future cash flows

The discounted cash flow (DCF) method values a company based on the present value of its projected future free cash flows.

When to use it: Best suited for businesses with stable, predictable cash flows and long-term visibility (e.g. infrastructure, mature SaaS).

Why it can be high: The model is highly sensitive to inputs like the underlying business plan, terminal value calculations and WACC. Optimistic business plans can inflate value quickly. It's also often based on management's forward-looking plan, which may be ambitious.

Where it misfires: In volatile industries or when projections are unreliable. For young companies where revenue growth may fluctuate as well. You can't write a business plan with +30% growth. Nobody is going to buy it. The method is also vulnerable to overly aggressive terminal value assumptions.

2. Comps: Market-based valuation from similar companies

Comparable company analysis looks at how similar public companies are valued based on metrics like EV/EBITDA or EV/Revenue.

When to use it: Ideal for benchmarking when the company has close public peers and the market is relatively rational.

Why it’s quick and intuitive: It reflects what the market is currently willing to pay. No complex assumptions required.

Why it's rarely highest or lowest: Comps may not be 100% comparable. The sector of the comps might be too broad compared to the target company. The target company might be a small-cap firm and the trading peers are mega corporations.

3. Precedent transactions: Anchored to real M&A activity

This method uses the multiples paid in past transactions of similar companies. You are basically looking at past deals of similar companies.

When to use it: When recent, comparable deals exist in the same industry. It's always good to take a reference point at past and relevant deals.

Why it often gives high valuations: Acquirers often pay premiums for control, synergies, and to win competitive auctions. These deal premiums push valuations up.

When it fails: If deals are outdated, occurred in different macro environments, or involved fundamentally different business models. So, the main problem is to find deals that are actually comparable and not just adjacent.

4. LBO: Valuation driven by return constraints

The leveraged buyout (LBO) method models what a financial buyer (e.g., a PE firm) could afford to pay while still achieving a target IRR, typically around 20%.

When to use it: In any sponsor-led process or to understand the valuation floor.

Why it gives low valuations: The model is reverse-engineered. Entry price is backsolved based on leverage, exit multiple, and cash flow growth. PE buyers are constrained by debt capacity and return thresholds.

Comparing outcomes: Which method gives the highest valuation?

Each method has a logic. Here’s a typical range:

• Precedent Transactions: Highest — Includes control premium and synergies

• DCF: High — Sensitive to growth assumptions and WACC

• Comps: Middle — Reflects market consensus, no premium

• LBO: Lowest — Constrained by IRR and leverage assumptions# 4 Ways to Value a Company — and Which Is Highest

Outlier scenarios:

• A peer trading at an inflated multiple can distort comps. So, you would need to adjust your peer group.

• You are comparing a small cap company to mega corporations in your trading peer group. No buyer is going to pay the full trading multiple.

• A DCF based on an unrealistic business plan inflates valuation.

• An outdated precedent can distort the valuation in either way.

Conclusion: Use multiple methods for balanced perspective

No single method is correct. In your daily job, we typically triangulate across all four different methods and adjust based on deal context. Strategic buyers may focus on synergies. PE buyers care about IRR. The best answer is rarely a single number—it's a well-reasoned range.