Houlihan Lokey IB Interview Questions

The three core methods are comparable company analysis ("comps"), precedent transactions, and the discounted cash flow (DCF). In a typical ranking, precedents come out highest and comps lowest. Precedents reflect prices paid to acquire whole companies, including a control premium and expected synergies, while comps reflect where minority, non-controlling shares trade in the public market. The DCF usually sits in between, and it carries the widest range, since it runs on your own assumptions instead of observed market prices.

It depends on the stage. For high-growth or unprofitable tech firms, bankers usually use EV/Revenue, because revenue is the most meaningful positive metric the company has. Once the firm is mature and profitable, EV/EBITDA is the standard multiple, same as in most other industries.

A DCF (discounted cash flow analysis) values a company as the present value of the cash it will generate. Present value is what those future dollars are worth today. You project unlevered free cash flow, the cash available to both lenders and shareholders, for five to ten years. Add a terminal value for all the years after that, then discount both back at the weighted average cost of capital (WACC), the blended return investors require. The sum is enterprise value. Subtract net debt (debt minus cash) to get equity value, then divide by diluted shares for a value per share.

You build it from public comparables. Take the levered betas of similar public companies (beta measures how much a stock moves with the overall market) and unlever them to remove the effect of each company's debt. Relever the median at the private company's target capital structure. Put that beta into CAPM (cost of equity = risk-free rate + beta × equity risk premium). Add a size premium if the company is small, plus any company-specific risk premium. Then combine the result with the after-tax cost of debt to get WACC (the weighted average cost of capital). That is the discount rate.

Buyers rely most on the documents that move the price: the audited financials and the quality of earnings (QoE) report, the key customer contracts and how concentrated revenue is among them, the debt schedule, the working capital history, and any pending litigation. The data room is the secure online folder where the seller posts confidential documents so shortlisted bidders can check the business before their final bid. A QoE is a review, typically by an accounting firm, of which profits will actually recur. Each item either confirms the earnings figure the buyer pays a multiple of, usually EBITDA, or exposes a liability that lowers the price or changes the deal terms.

It's case by case. First you build the full buyer universe: every strategic buyer (a company in a related business) and every financial sponsor (a private equity firm) that could plausibly buy the company. Then you cut it down on strategic fit, ability to pay, regulatory risk and how much leak risk and competitor exposure the client will accept. The final list can be a handful of parties in a targeted process, or 100 or more in a broad auction.

At a 25 percent tax rate, net income falls $7.50, cash rises $2.50, and net PP&E falls $10. Depreciation is the accounting charge that spreads the cost of a long-lived asset (property, plant and equipment, or PP&E) across its useful life. No money leaves the company when it is recorded, but the charge is tax-deductible, so it cuts the cash tax bill by $10 x 25% = $2.50. That tax saving is the only real cash effect, and it works in the company's favor.

A sell-side M&A process is usually a two-round auction. Prepare the materials and send a teaser broadly. Release the CIM only to buyers who sign an NDA, then collect first-round indications of interest. A shortlist then goes through management presentations and the data room to final bids, a signed purchase agreement, and closing. The CIM (confidential information memorandum, a detailed marketing book on the company) goes out after the NDA (non-disclosure agreement, a contract that keeps the information confidential) is signed, and not before. It holds sensitive financials, and the seller does not want to share them with anyone who has not agreed to keep them private.

On the day the debt is issued, cash and debt both rise by the same amount on the balance sheet. The cash flow statement shows the money raised as an inflow in cash flow from financing. The income statement does not move, because borrowed money is not revenue. It only feels the debt later, when interest expense cuts net income by the interest times (1 - tax rate).

The out-of-home advertising company gets 40%, the pipe installation company 25%, and the esports team 15%. Billboards are a fixed-asset business. Once the sign is built, each extra ad costs very little to sell, so most revenue stays as EBITDA. The 25/15 split is a judgment call. A specialty or infrastructure contractor can earn about 25%. Esports teams carry heavy player salaries and mostly lost money in 2022, so esports takes the lowest slot.

A sell-side M&A process is how a bank helps a client sell its company. It usually runs in four stages: preparation, first-round marketing, second-round diligence, then negotiation and closing. The main documents, in order, are the engagement letter, the teaser, the non-disclosure agreement (NDA), the confidential information memorandum (CIM), the process letters, the indications of interest (IOIs), the letters of intent (LOIs), and the definitive purchase agreement with its disclosure schedules.

Calendarization converts a company's financials from its fiscal year into the calendar year (January to December). A fiscal year is the 12-month reporting period a company picks, and it does not always end in December. You weight the two fiscal years that overlap the calendar year by the number of months each one contributes. The point is to measure every company in a comparable company analysis over the same period, so their valuation multiples can be compared.