How do you value a company?

Nov 2, 2022

Valuing a company comes down to figuring out how much you’re willing to pay for it based on what it can earn in the future and what similar companies have sold for. Three common methods are:

1. Discounted Cash Flow (DCF) Analysis
   • Estimate the company’s future cash flows (money it will earn).
   • “Discount” those cash flows back to the present (using an interest rate that reflects risk).
   • Sum them up to get today’s value of all those future earnings.
2. Comparable Companies
   • Look at similar, publicly traded companies.
   • Compare their share price to earnings (P/E ratio) or other multipliers.
   • Apply those ratios to your company’s earnings to estimate its value.
3. Precedent Transaction Analysis
   • Look at what other companies in the same space were bought for.
   • Compare deal prices relative to their earnings or revenue.
   • Use those benchmarks to figure out a fair price for your company.

Each method has its own strengths and weaknesses. In practice, investors often use a mix to get a clearer picture of what a fair deal looks like.