What are 4 ways to value a company and how do you rank them in terms of valuation?

Precedent transactions provide the highest valuation, since it reflects the multiple at which similar companies were acquired at. With acquisitions, there is a control premium, since companies will pay extra to own a company. Ownership provides control, and lets the owner decide what to do with the business, such as where to grow revenue or where to pull back spending. Since control has the potential to add value, people will pay a premium for it.

Usually DCFs provide a higher valuation than comparables because of optimistic assumptions by management, but it won’t be as high as precedent transactions usually. On the other hand, comparables are driven primarily by the market and less by assumptions.

LBO models will theoretically provide the lowest valuation, since they represent a floor value for the company. Usually, private equity companies will only buy companies for relatively cheap so that they can earn an outsized return when they sell the company 5 years later.

Note: in practice, LBO models may provide a higher valuation if a PE firm is buying a public company, since they will have to offer a premium over the current stock price. An LBO model may also provide a higher valuation if significant leverage is being used. However, for the purpose of the interview, it’s fair to say that LBO has the lowest value.