What are the 3 main valuation methods and how do they rank?

The three main valuation methods are trading comps, precedent transactions, and DCF. Precedents are usually highest because they include control premiums, trading comps are usually lower because they reflect minority public-market prices, and DCF has no fixed rank because it depends on assumptions.

Intuition

Trading comps reflect what the public market pays for a minority stake today, so there is no control premium. Precedent transactions reflect what acquirers paid for control, so they usually come in higher. A DCF is an intrinsic valuation based on projected cash flows and discounting assumptions, so it can land above or below the market-based methods depending on the inputs.

Watch

A common follow-up is 'When would the DCF give a higher value than precedent transactions?' Answer: when you use aggressive growth assumptions or a low discount rate. Interviewers test whether you understand the DCF is assumption-driven and not inherently tied to a fixed rank — the 'typical' ranking is a generalization, not a rule.

Deep Dive

Identify the three core valuation methodologies and explain how their output values typically rank relative to each other.

The three methods and their mechanics:

1. Comparable Companies Analysis (Trading Comps)

  • Take multiples (EV/EBITDA, P/E, etc.) from publicly traded peers
  • Apply those multiples to your target's metrics
  • Reflects current market sentiment — what the market is paying today for similar cash flows
  • No control premium baked in (these are minority-stake trading prices)

2. Precedent Transactions Analysis (Deal Comps)

  • Take multiples from completed M&A deals involving similar companies
  • Apply those acquisition multiples to your target's metrics
  • Typically includes a control premium (often 20–40% above unaffected trading price) because acquirers paid for control
  • May also reflect expected synergies, scarcity value, and competitive auction dynamics

3. Discounted Cash Flow (DCF)

  • Project the target's free cash flows, discount them back at WACC, and add a terminal value
  • Intrinsic value — less tied to current market multiples and driven by assumptions (growth rates, margins, WACC, terminal multiple or perpetuity growth rate)
  • Output range is often the widest of the three because small changes in WACC or terminal growth can materially change value

Typical Ranking:

  • Precedent Transactions are usually the highest because they reflect control value
  • Comparable Companies are often lower because they reflect minority trading values
  • DCF has no fixed rank; it can fall above or below either market-based method depending on assumptions

A common interview shorthand is that comps are lower and precedents are higher, with DCF somewhere in between, but the more precise answer is that DCF is assumption-driven and does not reliably rank in one spot.