What is the difference between dcf and lbo

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November Private Equity. Leaderboard See all. Carlsen PE. Rank: Monkey Hi, Could anyone tell me the key differences between lbo and dcf analysis. Log in or register to post comments. Trusted by over 1, aspiring private equity professionals just like you. Learn more. Comments 18 Add comment. Oct 22, - pm. Not different except one is transaction specific whilst the other is not.

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Dec 18, - am. See my WSO Blog. For example, banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets - so you wouldn't use a DCF for such companies. What other Valuation methodologies are there? When would you use a Liquidation Valuation? This is most common in bankruptcy scenarios and is used to see whether equity shareholders will receive any capital after the company's debts have been paid off.

It is often used to advise struggling businesses on whether it's better to sell off assets separately or to try and sell the entire company.

When would you use Sum of the Parts? This is most often used when a company has completely different, unrelated divisions -a conglomerate like General Electric, for example. If you have a plastics division, a TV and entertainment division, an energy division, a consumer financing division and a technology division, you should not use the same set of Comparable Companies and Precedent Transactions for the entire company.

Instead, you should use different sets for each division, value each one separately, and then add them together to get the Combined Value. Obviously you use this whenever you're looking at a Leveraged Buyout - but it is also used to establish how much a private equity firm could pay, which is usually lower than what companies will pay. It is often used to set a "floor" on a possible Valuation for the company you're looking at.

What are the most common multiples used in Valuation? What are some examples of industry-specific multiples? Technology and Energy should be straightforward - you're looking at traffic and energy reserves as value drivers rather than revenue or profit. Depreciation is a non-cash yet extremely large expense in real estate, and gains on sales of properties are assumed to be non-recurring, so FFO is viewed as a "normalized" picture of the cash flow the REIT is generating.

You use Enterprise Value because those scientists or subscribers are "available" to all the investors both debt and equity in a company. The same logic doesn't apply to everything, though - you need to think through the multiple and see which investors the particular metric is "available" to. Technically it could go either way, but in most cases the LBO will give you a lower valuation. Here's the easiest way to think about it: with an LBO, you do not get any value from the cash flows of a company in between Year 1 and the final year - you're only valuing it based on its terminal value.

With a DCF, by contrast, you're taking into account both the company's cash flows in between and its terminal value, so values tend to be higher. Instead, you set a desired IRR and determine how much you could pay for the company the valuation based on that.

How would you present these Valuation methodologies to a company or its investors? Usually you use a "football field" chart where you show the valuation range implied by each methodology. You always show a range rather than one specific number. How would you value an apple tree?

The same way you would value a company: by looking at what comparable apple trees are worth relative valuation and the value of the apple tree's cash flows intrinsic valuation.

Similarly, Enterprise Value is also available to all shareholders so it makes sense to pair them together. When would a Liquidation Valuation produce the highest value?

This is highly unusual, but it could happen if a company had substantial hard assets but the market was severely undervaluing it for a specific reason such as an earnings miss or cyclically. As a result, the company's Comparable Companies and Precedent Transactions would likely produce lower values as well - and if its assets were valued highly enough, Liquidation Valuation might give a higher value than other methodologies.

Let's go back to and look at Facebook back when it had no profit and no revenue. Classes are running in-person socially distanced and live online. Secure your seat today. The purpose of a valuation model is to determine the valuation of an enterprise.

These models typically project five or more years of future cash flows and discount those cash flows back to the present value. This process is known as a discounted cash flow DCF model. Learn more about DCF modeling and the steps to building the model. To the acquirer's future earnings per share the "per share" is important, as discussed below. So the question is whether the acquirer's EPS will increase or decrease after the transaction.

Typically, the acquisition is dilutive to near-term earnings, say one or two years, due to closing costs, and other costs associated with integrating the companies. But over time, initial costs diminish and synergies start to realize.