case study valuation

Valuation: the key to mergers and acquisitions

• Estimates and segmentation
• Profitability
• Competitive interaction

Example: Steel Producer Acquisition

Identify the problem, build a problem driven structure, lead the analysis and provide a recommendation.

Valuations are estimates of how much a company will be worth to a prospective buyer . The most important use for valuations in consulting interviews is in cases dealing with mergers and acquisitions . In order to weigh up our options in such scenarios, we need to be able to compare the potential gains or losses associated with various options - and this means we need to make valuations!

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Risky business.

An important point to note straight off the bat is that valuations can only ever be estimates rather than absolute values. Because valuation fundamentally involves making predictions about the future, there will always be an element of uncertainly or risk . We address these sources of risk in some detail - as well as drilling down into many of the other issues here in more depth - in our full length lesson on valuation in the MCC Academy . Here, though, we will have to confine our briefer discussion to the more immediate nuts and bolts of how valuations are made.

We'll explore the theory around valuation through a reasonably straightforward case study which hinges on your valuing a company .

Let's say your interviewer gives you the following case prompt:

"Our client is a steel producer who wants to expand by acquiring their competitor. The competitor offers to sell their plant for $1M. Should our client accept the deal at this price or not?"

Working through this case will provide a great introduction to valuation!

As always, your first step in tackling a case should be to correctly identify the problem . This is quite straightforward given this case prompt. In order to work out whether the client should be willing to pay the $1m asking price, we ultimately need to work out what the steel producer is worth to them . That is, we have to establish the value of this second steel plant to our client, to see whether it is worth paying $1m for .

Varieties of value

This might seem simple enough - however, we have not quite narrowed down the specific problem to be addressed yet. There is an extra layer of complexity to consider when identifying the problem in the case dealing with valuation.

Prep the right way

This is because there is not one single "value" concept for us to reach for. Instead, the word "value" can refer to several distinct quantities, all of which might be of interest in different contexts. These various varieties of value can be somewhat bamboozling at first, as some are radically distinct from other, whilst some are subsets of one another,. We need to be clear exactly which kind of value we are trying to calculate!

In this case study, what we are interested in is the value which acquiring this second steel producer will offer for our specific client. This quantity is referred to as the Asset Value or the Total Enterprise Value (TEV) .

It's all relative...

Note that this value is inherently relative to a particular buyer and will be different for different individuals. In our case, the value of the steel producer will likely be very different for our client, whom is already involved in the industry, to the value which might be derived from a buyer with no existing interests in steel. What we are calculating here is the price which it makes sense for a certain individual to pay for the asset in question .

Now we know exactly which kind of value we are trying to figure out, it's time to get on and figure out how we are going to get to an answer. This means structuring our approach to the problem .

The TEV of the second steel producer can be calculated as the sum of the "standalone" or "market" value of that company plus any "synergies" which emerge when it is combined with our client's operation. Those synergies can be further divided into revenue synergies and cost synergies . Segmenting the problem in this manner yields the following structure:

That was quick enough, but now we need to turn our attention to what the contents of those boxes actually mean...

Standalone Value

We'll deal with synergies shortly, for now, let's focus on how we might calculate the standalone value of an asset - the second steel producer in our example. As per our remarks on the variety of valuations above, there are several ways in which we might go about estimating the standalone value of a company . Three of the most common are:

• Net Present Value This is generally the most robust method of company valuation and is the most commonly used in consulting interviews . This is the method we will use here and we will return to NPV below.
• Multiples This is a method of valuing a company based on the ratio between the company's value and some financial metric such as EBITDA - which stands for "Earnings Before Interest, Taxes, Depreciation and Amortisation", but which we can approximate as cash flow for the purpose of case interviews.
• Asset Based Valuation In some cases, the cash flow or similar of a company might misrepresent its value . This might be especially useful in cases concerning businesses like shipping or real estate companies, and especially any companies which might be loss-making, but hold a large volume of valuable assets . In such situations, an asset based valuation calculates the net present value associated with owning individual assets rather than for the company as a whole.

Net Present Value

Let's focus on the Net Present Value, which is more relevant to our example. The NPV represents the value today of the expected future cash flows of the company . This is often referred to as the value of cash flows in "perpetuity".

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Imagine you have the option to buy some bond which yields you a payment of $20 per year every year. The NPV of this bond is the amount which it would be sensible for you to pay today to receive this guarantee of $20 per year in perpetuity.

In our video lesson on valuation in the MCC Academy , we give a full explanation as to the rationale and mathematics underpinning NPV - which can be very important in tacking more complex case studies involving valuation . However, with limited space here, we'll skip straight to the payoff, and note that the NPV can be calculated via the following equation:

Discount rate

A crucial element of the Net Present Value equation is the discount rate (r). The discount rate effectively accounts for the intuitive fact that a dollar today is not worth the same as the guarantee of a dollar one year from now . In normal circumstances, having the same amount of money immediately will be more valuable than having the same amount at some later point in time. For instance, if you are given your dollar right away, you might deposit it in a savings account and earn interest , so you will have a dollar and a few cents more a year from now.

The discount rate will vary for different scenarios and you might be expected to make a reasonable estimation of its expected level for a case. Generally, the discount rate will be higher where a business venture is more risky . This reflects the higher interest rates which will be required by lenders or investors to entrust their money with a business has a higher risk of never managing to pay them back.

As a rule of thumb, you can think about a spectrum of discount rates ranging from 3% for a very safe business to 20% for a very risky venture .

Now, let's turn our gaze to synergies. The possibility of synergies is what will ultimately make our steel producer worth more or less to different buyers , as the new company may interact more or less beneficially with the companies or other assets they already own.

The idea that what one owns already determines how much one is willing to pay for new items if pretty intuitive. Imagine you are selling a collectable item - say a novelty teapot, baseball card or the like. You will obviously get a lot more for it if you find a buyer who needs that item to complete their collection! Higher up the value scale, effects like this are known to cause interesting phenomena in the art market . In particular, there are cases where it makes sense for buyers to pay as much as possible for a painting at auction, as the new market value will increase the prices of the other works in their collection by the same artist by an amount that more than compensates their extra expenditure.

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Returning to our example, we can divide the possible synergies for our client in acquiring the steel producer into two sides - cost synergies and revenue synergies. Let's look at each in turn.

Cost synergies

Cost synergies are realised when the merging of two companies allows for the reduction of costs . Such synergies might be achieved in a few different ways. For instance:

• Merging cost centres Combining two companies can allow for the removal of duplicated structures or staff . In our example, the newly merged company might make cuts to staff in supporting roles such as HR, management or R&D.
• Economies of scale Increasing the size of a business often allows for savings to be made by procuring goods or services in larger volumes - and thus for lower prices . For example, steel manufacture will require both raw materials and fuel/energy and a larger operation buying larger volumes of these might be able to negotiate lower prices. Similarly, the larger company might be able to negotiate lower shipping costs on their outgoing products.

Revenue Synergies

Revenue synergies are realised when combining two companies allows them to increase the revenue they generate . A typical way of deriving revenue synergies is via cross-selling , where two merged companies can sell their products to each other's customers.

In our example, cross-selling would be a strong possibility where our client and the acquired producer have previously specialised in different parts of a full spectrum of steel products which the same customers might be interested in buying. For instance, say our client's company has previously only offered large, unshaped ingots of raw steel and the new producer has specialised in smaller slabs or pre-formed items. The newly merged entity could cross-sell to existing customers who need both kinds of product.

Otherwise, revenue synergy could be obtained even if the two had already been selling the same products to the same customers as the newly combined operation might allow the merged company to fulfil larger orders and so access new customers dealing in larger volumes.

Not always a good thing...

Note that synergies will not always be positive . It might be that merging two companies would actually cause problems. For example, it would be highly damaging from a brand perspective for a health food company to acquire a processed food producer, and could cost them a lot in sales. Brand will likely not be a major concern in the steel industry, but will often be crucial in other case.

With our structure complete, we can proceed to lead the analysis as usual. This will mean asking the interviewer a few considered questions in order to estimate values for the various elements of the structure . Once you have these values, calculating the value of the company is straightforward.

Let's say that, in our example, we valued the steel producer as being worth $1.5m. If there are no other opportunities available with higher values, then we should recommend that our client goes ahead with the acquisition. However, if our client could invest the same $1m in another company or set of assets valued at over $1.5m, then we should advise that they do this instead. Valuation has given us a means to objectively choose between opportunities.

Impress your interviewer

This article is a good primer on valuation, helping you get to grips with the main concepts and walking you through a relatively simple example of a valuation-based case study. However, the problems in your case interview are likely to be somewhat more involved. To get across all aspects of valuation in the detail you will need to land an MBB consulting job, the best resource is the "building blocks" section of the MCC Academy . There, our full length video lesson explores more complex aspects of valuation - including things like a full discussion of risk as it pertains to case studies and of the mathematics around net present value. We do our best, but it simply isn't possible to cram all this material into an article of this size!

For now, though, you should certainly start applying what you have learnt here to practice case studies . Remember to also check out our other building block articles on estimates , profitability , pricing and competitive interaction to learn about more themes that come up again and again in consulting interviews!

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Valuation cases usually require estimating the price of a firm, patent, or service in the market .

This type of case can either be a subset of an  M&A  case, in which you need to know a company's worth before purchasing, or a standalone case (rare). For instance, “How much is Pfizer worth today?” In strategy consulting, these questions are rather rarely seen. However, cases where you do need to valuate something usually start with “ How much would you pay for… ”

The most common methods of valuating are the Discounted Cash Flow (DCF) and the industry multiple method

As these are still case studies meant to fit in an interview round, the interviewer will very likely not ask you to perform an exact and comprehensive valuation analysis. Instead, you may be required to estimate the worth of a product, patent, or a service. You may also have to judge if an offered price is reasonable.

Discounted Cash Flow method

The first valuation method is the Discounted Cash Flow method. This method shows how much money you would have in your savings account at a certain interest rate in order to provide you with the same annual cash flow generated by the company that is being evaluated. Here, you simply divide projected annual cash flows by a discounted rate (or interest rate). Of course, the discount rate of your savings account will be much lower than that of an investment in a company. This is so because the risk you take putting your money in a savings account is much lower than the risk of investing in a company.

Industry multiple method

The DCF method is limited since it does not take into account additional dimensions other than money (unless you quantify those dimensions into the future cash flows).

Football teams, for instance, are often overvalued compared to their generated returns. For such cases, there is another method called the industry multiple method.

This method allows you to valuate a firm by using a metric known to this company and multiplying it by the associated industry multiple. This can be done for similar players in the industry to assess their relative valuations using  benchmarking .

An example of a multiple ratio is the price-to-book ratio (P/B). This multiple is the ratio of the  actual firm valuation  (based for example on M&A  deals) and the  book value of the same firm  (value of its assets, which can be found in the balance sheet ). If a firm’s assets added up to 200 million, and it was sold for 100 million, the ratio is 0.5 (100 million/200 million). Do this for a set of representative industry players, take the average and you get the average industry multiple. Finally, you multiply the industry multiple with the value of the assets. 

Other commonly used ratios are the price-earnings ratio (P/E ratio or PER) and the EBITDA ratio.

Since you will not be required to calculate the value of an investment on too high a level of detail, it is not necessary to learn values for different interest rates or industry multiples by heart. However, to give you an idea about orders of magnitude:

• A good guess for an industry multiple is EBITDA*10.
• Good guesses for interest rates would range from 3% (inflation) to up to 20% for highly speculative investments.

Key takeaways

• Use the  Discounted Cash Flow (DCF) method to valuate a firm based solely on its expected profits.
• Use the industry multiple method to double-check if the DCF valuation is reasonable. Sometimes other aspects need to be factored in like brand value, customer loyalty, liabilities, etc.
• There are several types of industry multiples to choose from. For more precise valuation, choose more types of industry multiples.

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Smart meters.

Caribbean Island – MBB Final Round

Hacking the Case Interview

Have an upcoming valuation case interview and don’t know how to prepare? We have you covered!

In this article, we’ll cover what a valuation case interview is, a step-by-step guide to solve any valuation case, and a comprehensive review of the major valuation methodologies.

If you’re looking for a step-by-step shortcut to learn case interviews quickly, enroll in our case interview course . These insider strategies from a former Bain interviewer helped 30,000+ land consulting offers while saving hundreds of hours of prep time.

What is a Valuation Case Interview?

A valuation case interview is a type of interview commonly used in management consulting and finance to assess a candidate's analytical, quantitative, and problem-solving skills.

In a valuation case interview, candidates are presented with a business scenario that involves determining the value of a company, an asset, or an investment opportunity.

The candidate is expected to use financial modeling, data analysis, and critical thinking to arrive at an appropriate valuation.

The case typically involves evaluating various factors such as financial statements, market trends, industry benchmarks, growth projections, and relevant economic indicators.

Candidates may be asked to perform calculations, create financial models, and provide a well-reasoned recommendation based on their analysis.

Valuation case interviews not only assess a candidate's ability to perform financial analysis but also evaluate their communication skills, as candidates are required to explain their thought process, assumptions, and findings to the interviewer.

These interviews are common in fields like investment banking, private equity, consulting, and corporate finance, where accurate valuation is crucial for decision-making.

How to Solve a Valuation Case Interview

There are eight major steps in a valuation case interview. Although these are the major steps, know that each valuation case interview can be slightly different.

Depending on your interviewer, they may spend more time on certain steps than others. They may also choose to skip certain steps that they feel are unnecessary for the discussion.

1. Understand the objective

This foundational step involves clarifying the scope of the valuation and its purpose within the context of the case.

Whether you are valuing a company, a project, an asset, or something else, it's crucial to define precisely what is being valued and the reasons behind the valuation.

This understanding serves as a guiding beacon for the rest of your analysis, helping you tailor your approach and focus on the most relevant data and methodologies.

A clear grasp of the valuation objective demonstrates your ability to extract critical information from the case prompt and ensures that your subsequent analysis is aligned with the intended outcome.

By establishing a solid foundation in this step, you set the stage for a well-structured and insightful valuation analysis that addresses the core challenges presented in the case.

2. Gather information

Once you've comprehended the valuation objective, you need to identify the key factors and variables that will influence your analysis.

This may include financial statements, industry benchmarks, market trends, growth projections, and more. Efficient data collection demonstrates your research skills and your ability to pinpoint the essential components driving the valuation.

As you accumulate data, you'll start forming an initial understanding of the company's financial health, competitive landscape, and potential risks.

This knowledge will be invaluable as you move forward to apply appropriate valuation methods.

3. Select a valuation method

The next step involves selecting the appropriate valuation method based on the nature of the business and the available data.

Common valuation methods include:

• Market Capitalization : Values the company based on its current stock price multiplied by the total number of outstanding shares.
• Discounted Cash Flow (DCF) Analysis : Calculates the present value of future cash flows generated by the company.
• Comparable Company Analysis (CCA) : Compares the company's financial metrics to similar publicly traded companies to estimate its value (e.g., using an earnings, revenue, EBITDA multiple)
• Precedent Transaction Analysis (PTA) : Examines the valuation multiples of similar companies based on their historical transactions.
• Book Value : Calculates the company's net worth by subtracting its liabilities from its assets.
• Liquidation Value : Estimates the value of the company's assets if it were to be liquidated.
• Replacement Cost : Determines the cost to replace the company's assets with equivalent new assets.
• Asset-based Approach : Calculates the company's value based on the fair market value of its assets.

Each method has its strengths and limitations, and your choice should align with the company's characteristics and the information you've gathered.

For instance, if you're valuing a stable and mature company with reliable cash flows, Discounted Cash Flow (DCF) might be suitable.

On the other hand, if market data for similar companies is readily available, Comparable Company Analysis (CCA) could be more relevant.

This step showcases your analytical acumen and ability to tailor your approach to the specific case. By justifying your method selection with clear reasoning, you'll demonstrate your expertise in translating theoretical concepts into practical decision-making tools.

4. Perform financial analysis and calculate the valuation

Afterwards, you'll apply the chosen valuation method to the company's financial data and industry benchmarks. This is where your quantitative skills come to the forefront.

For example, for a Discounted Cash Flow (DCF) analysis, you'll forecast the company's future cash flows, apply a discount rate to account for the time value of money, and calculate the present value of those cash flows.

As another example, for a Comparable Company Analysis (CCA), you'll identify publicly traded companies similar to the target company, gather their financial ratios, and apply those ratios to the target company's financial data.

This step showcases your ability to handle complex calculations and interpret financial metrics.

Precision, attention to detail, and a solid understanding of financial concepts are crucial to ensure accurate results that form the basis of your valuation.

5. Perform sensitivity analysis

Once you've derived your valuation estimate, it's crucial to assess its sensitivity to changes in key assumptions.

This step demonstrates your understanding of the potential risks and uncertainties that can impact the valuation.

By tweaking variables like growth rates, discount rates, or terminal values, you can gauge how different scenarios might influence the valuation outcome. This showcases your ability to think beyond the numbers and consider the broader business context.

It's a reflection of your analytical rigor and strategic mindset, as you'll be able to discuss how changes in market conditions, competitive dynamics, or industry trends could affect the valuation result.

Sensitivity analysis reveals your ability to anticipate challenges and make more informed decisions under various circumstances, a skill highly valued in consulting and financial roles.

6. Check reasonableness

It's essential to perform a reasonableness check on your calculated valuation.

This step involves using your business intuition and understanding of industry norms to ensure that the valuation result aligns with the reality of the company's performance and market conditions.

By comparing your valuation estimate to comparable companies' valuations, recent transactions, or industry benchmarks, you can identify any glaring discrepancies that might indicate errors in your assumptions or calculations.

Additionally, considering qualitative factors such as the company's competitive landscape, growth potential, and economic trends helps ensure that your valuation aligns with logical expectations.

Demonstrating your ability to critically evaluate your results and validate them against real-world context showcases your analytical rigor and ability to provide practical insights, both of which are highly valued in consulting and finance roles.

7. Present your findings

In the final step of solving a valuation case interview, you’ll present your findings.

It's crucial to effectively communicate your findings to the interviewer. Clear and concise communication is a key skill in consulting and other professional fields.

Begin by summarizing the key details of the case, including the company's background, the valuation method used, and the main assumptions made.

Present your calculated valuation and the reasoning behind it, highlighting the critical drivers that influenced the outcome.

Articulate any potential limitations or uncertainties in your analysis to show your awareness of the inherent complexities in valuation.

Delivering a well-structured and confident summary of your findings not only showcases your technical skills but also your capacity to translate insights into actionable recommendations, a quality highly valued in consulting roles.

8. Consider strategic implications

It can be helpful to go beyond just presenting your findings and talk through what the potential strategic implications are.

This is your opportunity to showcase your understanding of the broader business context and your capability to translate numerical findings into actionable insights.

Discuss how your valuation aligns with the company's current market position, growth prospects, and competitive landscape.

Highlight any potential areas of concern, such as overvaluation or undervaluation, and suggest strategies to address these issues.

Whether it's recommending expansion into new markets, optimizing operational efficiency, or considering potential mergers and acquisitions, your recommendations should be well-founded, innovative, and tailored to the company's unique circumstances.

This step allows you to demonstrate your ability to think strategically and provide value beyond numbers, qualities highly sought after in consulting and financial roles.

In addition to valuation case interviews, we also have additional step-by-step guides to: market entry case interviews , growth strategy case interviews , M&A case interviews , pricing case interviews , operations case interviews , marketing case interviews , and private equity case interviews .

Valuation Case Interview Examples

Valuation case interview example #1.

Your client, a private equity firm, is interested in investing in a technology startup. They have approached you to perform a valuation analysis of the startup. The startup operates in the e-commerce sector and has developed a cutting-edge platform that connects local artisans with customers seeking unique handmade products.

Your task is to determine the valuation of the startup using appropriate valuation methods and provide recommendations based on your analysis.

How to solve : The startup operates an e-commerce platform that connects local artisans with customers looking for unique handmade products. The platform aims to showcase artisanal craftsmanship and provide a marketplace for these products.

The startup provides the following financial information for the past year:

• Annual Gross Merchandise Value (GMV): $5 million
• Projected GMV Growth Rate: 25%
• Operating Expenses: $2 million
• Net Income: $1 million
• Estimated Discount Rate: 15%

We will use the Discounted Cash Flow (DCF) method and the Market Multiple method to determine the valuation of the startup.

After doing the analysis, suppose we get:

• DCF Valuation: $8.2 million
• Market Multiple Valuation: $7.5 million

Assess the reasonableness of the blended valuation estimate by comparing it with recent acquisitions or investments in the e-commerce sector.

Discuss the impact of variations in growth rates, discount rates, and key assumptions on the valuation. Highlight potential scenarios that could affect the valuation range.

Recommend a valuation range of $7.5 million to $8.2 million for the startup. Emphasize the startup's unique value proposition in connecting artisans with customers and the potential for growth in the e-commerce market.

Valuation Case Interview Example #2

Your client is a technology startup that is seeking investment from venture capitalists. They are looking to raise funds to expand their product line and market presence. As a consultant, your task is to perform a valuation analysis of the startup and recommend a valuation range for their company

How to solve : The startup is a technology company that has developed a cutting-edge software solution for streamlining supply chain operations. They provide real-time visibility into inventory levels, order status, and production schedules, helping companies optimize their supply chain efficiency.

• Annual Revenue: $2.5 million
• Projected Revenue Growth Rate: 30%
• Operating Expenses: $1.2 million
• Net Income: $800,000
• Estimated Discount Rate: 20%

We will use both the Discounted Cash Flow (DCF) method and the Comparable Company Analysis (CCA) method to determine the valuation of the startup.

• DCF Valuation: $6.8 million
• CCA Valuation: $7.5 million

Discuss the impact of changes in growth rates, discount rates, and key assumptions on the valuation. Highlight potential scenarios that could influence the valuation range.

Recommend a valuation range of $6.8 million to $7.5 million for the startup. Emphasize that the negotiation process with potential investors should consider the company's unique technology, growth prospects, and competitive landscape.

Valuation Case Interview Example #3

Your client is a manufacturing company interested in acquiring a competitor in the same industry. They have asked you to conduct a valuation of the target company to guide their acquisition strategy. The target company produces similar products and has a strong distribution network.

Your task is to determine the valuation of the target company and provide a recommendation for an offer price.

How to solve : The client, a manufacturing company, seeks to acquire a competitor with a similar product line and a robust distribution network. This acquisition would expand their market share and potentially provide operational synergies.

Collect financial data for both the client company and the target company:

• Client Company Revenue: $100 million
• Target Company Revenue: $60 million
• EBITDA Margin (both companies): 15%
• Industry Multiples: Average EV/EBITDA multiple of 8

We will use the Comparable Company Analysis (CCA) method and the precedent transaction method.

• Comparable Company Analysis Valuation: $72 million
• Precedent Transaction Valuation: $68 million

Discuss the sensitivity of the valuation to changes in EBITDA margin and industry multiples, as well as potential impacts on the acquisition strategy.

Recommend a valuation of $70.4 million for the target company. Emphasize that the acquisition aligns with the client's growth strategy and provides access to a stronger distribution network.

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The Venture Capital Case Study: What to Expect and How to Survive

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There’s plenty of information online about case studies in finance interviews (IB, PE, etc.), but the venture capital case study remains a bit mysterious.

Depending on your source, a VC case study might consist of a “ cap table ” exercise where you calculate the company’s ownership over many investment rounds and the proceeds to each group upon exit…

…but it could also be a qualitative discussion of a market, an evaluation of a specific startup, or even a simple 3-statement model .

But if you’re interviewing at an early-stage VC fund (i.e., Seed and Series A investments), the most common type is the “Evaluate a startup and recommend investing or not investing” one.

The VC firm might give you a short investment memo or slide deck for the company, ask you to read it, and then say “yes” or “no” based on your analysis and interpretation.

We’ll go through a short example for a fictional startup called PitchBookGPT , which comes directly from our new Venture Capital & Growth Equity Modeling course .

This is a summary version, but it should be enough to give you some practice:

The Video Tutorial and the Files

If you prefer to watch or listen to this tutorial, you can get the 14-minute video walkthrough below:

If you prefer to read, you can continue with this article.

You can get the files, including the company’s pitch deck, here:

• PitchBookGPT – Seed Round Pitch Deck (PDF)
• Venture Capital Case Study Prompt (PDF)
• Venture Capital Case Study Solutions and Investment Recommendation (PDF)
• Case Study Walkthrough and Explanation – Slides (PDF)
• SaaS Valuation Multiples and Historical Data (PDF)

Video Table of Contents:

• 0:00: Introduction
• 1:58: Part 1: What to Expect in VC Case Studies
• 3:10: Part 2: What Do VCs Want in Early-Stage Investments?
• 4:51: Part 3: “The Numbers” for PitchBookGPT
• 8:16: Part 4: The Market, Product, and Team
• 11:45: Part 5: Recommendation and Counter-Factual
• 13:04: Recap and Summary

This Venture Capital Case Study Example: PitchBookGPT

In short, this startup is riding the AI hype train and plans to offer a subscription service that will automate parts of the pitch book creation process at investment banks.

It won’t replace Analysts or Associates because it can’t create entire presentations with all the correct details.

But it speeds up the process by generating slide templates based on your queries, presentation data, and free examples on the sec.gov site .

For example, if you type in “ SPAC vs. IPO ” or “Market overview slide with monetary and fiscal factors,” the software will generate sample slide images, and you can click the one you want to get an editable PowerPoint version:

The “artificial intelligence” part comes in because simple keyword searches do not work well when searching for specific slides; a slide’s purpose often differs from its text .

Also, machine learning could work well for a problem such as converting slide images into editable PowerPoint templates.

This is much trickier than it sounds for moderately complex slides, and a rules-based system is less efficient than using huge data sets for the image-to-slide translation.

This startup claims that its service can boost Analyst productivity by 30% and generate millions in extra fees for the average bank, and it plans to sell it to boutique banks for $2,000 per month.

They want a $2 million seed investment at a $20 million post-money valuation, meaning that we (the VCs) will own 10% if we invest.

So, should we do the deal?

What Do Venture Capitalists Look for in an Early-Stage Investment?

To answer this question, you need to think about what early-stage VCs look for in deals.

Most early-stage companies do not have revenue, but they do have markets and teams .

Since early-stage investing is so risky, VCs seek opportunities with the potential for very high cash-on-cash multiples , such as 10x in Series A rounds or 100x in Seed rounds.

To be clear, these are the targeted multiples.

Most startups fail, and even the ones that succeed do not come close to a 100x multiple in most cases.

Since this failure rate is so high, early-stage VCs need to aim high by finding companies with the potential to serve huge markets.

Here’s a summary of the different stages:

Since the asking valuation is $20 million, we can reframe this case study as:

“Could this company potentially reach 100x that valuation, or $2 billion? If not, what about something like 10 – 20x, for a $200 – $400 million valuation?”

You can answer this question by doing some quick math and qualitatively evaluating the market, product, and team.

Venture Capital Case Study, Part 1: The Numbers

In its slide deck, this company claims that there are ~4,000 boutique banks worldwide with 1 – 20 employees and that these banks alone can support a $100 million market size (since 4,000 * $2,000 / month * 12 months = $96 million).

They plan to target these smaller and mid-sized banks because they’re easier to reach and they have fewer resources for pitch book creation.

But this company makes a common mistake with this claim: it assumes it will capture 100% of this market.

That never happens in real life, even in a narrow niche like this one – because there are competitors and many firms that don’t need the product.

In large markets (tens or hundreds of billions of dollars), capturing even a tiny percentage might be a good result.

In a narrower market like this one, something like 10 – 20% might be plausible if the company executes well.

That means a more realistic revenue estimate is $10 – $20 million.

Startup / SaaS Valuation

Subscription software companies are usually valued based on a multiple of annual recurring revenue (ARR) , and this multiple is typically between 5x and 10x for public companies (more on SaaS accounting ):

If we apply these multiples to the company’s revenue estimates, we get a valuation range of $50 million (5x * $10 million) to $200 million (10x * $20 million).

This is a great result for the company, but it’s far below what most seed-stage VCs want.

A $50 million exit value would be a 2.5x multiple, while a $200 million exit value would be a 10.0x multiple.

And these numbers represent the potential outcomes and assume that everything goes well.

Also, these numbers do not account for the dilution in future funding rounds.

This 10% ownership will likely fall to 7%, 5%, or even 3% as the startup raises money in the Series A, B, and C rounds, which means even lower returns multiples.

You might say, “OK, but couldn’t this company’s revenue go much higher? They should charge per user , not per firm, for this service” (so the Average Revenue per User would be higher).

And that leads us to the next point about the qualitative evaluation of the market, product, and team.

Venture Capital Case Study, Part 2: The Market, Product, and Team

I wouldn’t say this company’s product is “terrible” – I’ve seen much worse startup ideas.

But it faces a “no man’s land problem” because the ideal customers differ from the reachable customers .

Boutique banks tend to be much more cost-conscious than large firms and don’t necessarily want to add a $2,000 monthly expense for multiple employees.

If a boutique bank needed this service for 5 Analysts, $2,000 per user per month would mean $120K per year , which is about the cost of hiring a full-time Analyst.

Many small banks would look at this and say, “OK, it speeds up presentations… but for that price, we could hire another Analyst and get client support, Excel work, and more.”

Also, small banks depend far less on long and detailed pitch books than large banks.

Most new deals come from longstanding relationships, not inbound inquiries or bake-offs / beauty pageants .

PitchBookGPT could target large banks ( the bulge brackets ) instead, as they are more willing to pay for training and productivity tools.

This service would be more useful for large firms because they tend to produce the 100+ slide pitch books where automation tools could save time.

However , it’s also much more difficult to close deals in this market, and compliance concerns mean these banks are less willing to share their data with external parties.

Could you imagine Goldman Sachs or Morgan Stanley uploading all their pitch books and slides to a VC-funded startup that may not even exist in a year?

Here’s my summary of the product/market fit problem:

Other Points in This Venture Capital Case Study

We don’t have time to analyze the team or the expected use of funds for this $2 million investment, but you would consider both in real life.

In short, they’re “fine but not amazing” – some of the budget numbers seem a bit too low (e.g., for the engineers), while others are on the high side (sales & marketing), but nothing seems completely crazy.

Similarly, the team (all fake names and bios) has relevant experience but looks a bit “junior,” so we’re neutral on them.

Our Final Decision

In short, we’d say no to this deal because we think a 100x multiple in any reasonable time frame – such as 5 or even 10 years – is implausible.

A 5 – 10x multiple might be feasible, but that’s not a great “stretch goal” for a seed-stage deal.

To reach a $1 – 2 billion valuation, the company would need hundreds of millions in annual revenue, and we don’t think that’s realistic for its business model and market.

The company could develop a different product or offer higher-end services to larger firms, but it doesn’t even have a “Version 1.0” yet, so that would be putting the cart before the horse.

You can view the full recommendation here .

What Would Change Our Mind?

If a few factors were different, we might be more inclined to recommend this deal:

• Per-Seat Pricing – Maybe they can’t charge $2,000 / user / month, but even something like $1,000 / user / month could increase potential revenue at many firms.
• Lower Asking Price – While a $2 million seed investment at a $20 million post-money valuation is not unheard of, it is aggressive. If the asking valuation were only $5 – 10 million, the deal math would be more feasible (maybe not for a 100x multiple, but something like 20 – 30x).
• Higher-End Product – For example, banks might be willing to pay more if this product could replace employees rather than just boost their productivity. But that would require far more capital to develop and might require technology that doesn’t exist.

The Venture Capital Case Study: Final Thoughts

In short, unlike many startups, this PitchBookGPT idea isn’t necessarily “bad.”

There are proven markets for productivity tools, slide templates, and reference models in both PowerPoint and Excel.

But the problem is that this isn’t a great early-stage VC idea – at least not for the deal terms the company wants.

That’s not great news for this fictional company, but it is reassuring if you’re a junior banker worried about getting replaced by AI anytime soon.

It probably won’t happen – and in the near term, these new tools might even improve your life.

If you liked this article, you might be interested in:

• The Growth Equity Case Study: Real-Life Example and Tutorial
• The Full Guide to Healthcare Private Equity, from Careers to Contradictions
• Healthcare Investment Banking: The Best Group to Check Into When Human Civilization is Collapsing?

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

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2 thoughts on “ The Venture Capital Case Study: What to Expect and How to Survive ”

This was a good read!

I noticed that you have a typo under the “slide dick”, right after the header of part 1 case study – or was that meant to be intentional ?

Thanks for pointing that out (fixed now). Nope, not intentional, somehow both spelling and grammar check missed it, and so did I (one issue when you stare at these documents all day…).

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Master Cap Tables and Startup Modeling

Learn VC and growth equity financial modeling via 5 short case studies and 4 extended case studies on everything from AI to SaaS to biotech.

Company Valuation Using Discounted Cash Flow

Leading provider of teaching materials for management education

This module explains how to use discounted cash flow (DCF) to value a company and explores different DCF approaches to valuation.

6 Topics in This Module

Introduction.

The introduction begins with the bestselling  Harvard Business Review  article “What’s It Worth? A General Manager’s Guide to Valuation." The article first describes the limitations of the standard WACC approach of the DCF valuation of companies. As an alternative, the article recommends the APV, real options, and equity cash flow methods as better suited for valuing operations, opportunities, and ownership claims, respectively. The first supplement, “Note on Cash Flow Valuation Methods: Comparison of WACC, FTE, CCF and APV Approaches,” covers the same material at greater length and uses a capstone example to compare and contrast the various methods. The second note, "Valuation Methods and Discount Rate Issues: A Comprehensive Example," reviews the various valuation methods and uses a simple example to demonstrate the consistency of each method's results under similar assumptions.

WACC-Based DCF and Market Multiples

This section compares DCF valuation using WACC to the market multiples approaches. Mercury Athletic: Valuing the Opportunity , a brief case, uses the potential acquisition of a footwear subsidiary to teach students DCF valuation using WACC and compares the results with those drawn from market multiples approaches. The alternative case,  Healthineers: A Strategic IPO , covers the valuation of a subsidiary of Siemens. In addition to valuing the subsidiary by DCF and market multiple methods, students are also asked to do a sum-of-parts valuation of the diversified firm. The supplementary technical note, "Corporate Valuation and Market Multiples," reviews the market multiples method of valuation and its limitations.  

Adjusted Present Value

In Valuation of AirThread Connections , students must value a potential acquisition, a regional cellular provider, with the WACC-based DCF method and with APV. They must choose which method to use when the capital structure is stable and when it is changing, and estimate the effect of capital structure changes on assumptions in determining beta and the cost of capital. The alternative case,  Seagate Technology Buyout , is a two-session case that concerns a leveraged buyout (LBO) of the disk drive operations of Seagate. Students are asked to perform both WACC-based DCF and APV valuations of the target (including estimating the cost of capital from comparables) and address the impact of financing decisions on value. The supplementary article, “Using APV: A Better Tool for Valuing Operations,” describes an APV analysis using a hypothetical company.

Capital Cash Flow

In  Berkshire Partners: Bidding for Carter’s , Berkshire Partners is making a bid and deciding on a financial structure for an LBO of a leading producer of children’s apparel. Berkshire’s financial team uses CCF to calculate the value of William Carter Co. The students are also asked to consider how value is created in the private equity world. "Note on Capital Cash Flow Valuation," the supplemental reading, walks students through the mechanics of the calculation.  

Equity Cash Flow

In  Acova Radiateurs , students must value a takeover candidate for an LBO in an international setting. The teaching note provides one- and two-day teaching plans, as well as ECF and CCF valuations of Acova. The alternative,  The Hertz Corporation (A) , is a more difficult case, examining the LBO of Hertz in 2005. Students are asked to locate the sources of value in the deal, in operations, and in the financing and deal structures. While the case itself lacks detailed financial projections, both the teaching note and an electronic spreadsheet include sample projections. The supplement, "Note on Valuing Equity Cash Flows," is for advanced students. It teaches the mechanics and examines the biases and shortcomings of the ECF method.  

Comprehensive Simulation

The following simulation can be used as a capstone for this module. It gives students the opportunity to use different valuation approaches. In Finance Simulation: M&A in Wine Country , students play the role of the CEO at one of three publicly traded wine producers, evaluating merger and acquisition opportunities among the three companies. WACC-based DCF, APV, and market multiples are some of the methods at their disposal to work up bids and negotiate deals.  

1 hour, 30 minutes

About this module

Valuation is a key skill for managers. This module focuses on using DCF to value a company.  The materials cover different approaches, including DCF using weighted average cost of capital (WACC), adjusted present value (APV), capital cash flow (CCF), and equity cash flow (ECF), as well as sum-of-the-parts valuation. Students can explore how valuations using DCF compare with valuations using market multiples. The module also includes comprehensive simulations that instructors can use as capstone exercises.

Learning Objectives

Understand why managers use DCF to value companies

Learn how to construct a discounted cash flow valuation

Appreciate the issues that arise in determining an appropriate discount rate

Explore different approaches to discounted cash flow valuations, including WACC-based DCF, APV, capital cash flow, and equity cash flow

Understand how a valuation using DCF compares to a valuation using market multiples

Practice valuations using the appropriate DCF methodology 

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Valuation: Measuring and Managing the Value of Companies, 7th edition

At the crossroads of corporate strategy and finance lies valuation. This book enables everyone, from the budding professional to the seasoned manager, to excel at measuring and maximizing shareholder and company value.

John Wiley & Sons, 2020 | Tim Koller, Marc Goedhart, David Wessels

Valuation: Measuring and Managing the Value of Companies , celebrating 30 years in print, is now in its seventh edition (John Wiley & Sons, June 2020). Carefully revised and updated, this edition includes new insights on topics such as digital; environmental, social, and governance issues; and long-term investing, as well as fresh case studies.

Clear, accessible chapters cover the fundamental principles of value creation, analysis and forecasting of performance, capital structure and dividends, valuation of high-growth companies, and much more. Financial Times calls the book “one of the practitioners’ best guides to valuation.”

This book provides useful information, such as the following, for financial professionals in any location:

• complete, detailed guidance on every crucial aspect of corporate valuation
• explanation of the strategies, techniques, and nuances of valuation that every manager needs to know
• details on both core and advanced valuation techniques and management strategies

In addition, the book’s companion website provides more information on key issues in valuation, including through videos, discussions of trending topics, and real-world valuation examples from capital markets.

Valuation: Measuring and Managing the Value of Companies is a handbook that can help managers, investors, and students understand how to foster corporate health and create value for the future—goals that have never been more timely.

Inside Valuation

With the authors, in the news, yahoo finance “on the move”, valuewalk’s value talks, the startup life, about the authors.

Tim Koller is a partner in McKinsey's Stamford, Connecticut, office, where he is a founder of McKinsey's Strategy and Corporate Finance Insights team, a global group of corporate-finance expert consultants. In his 35 years in consulting, Tim has served clients globally on corporate strategy and capital markets, mergers and acquisitions transactions, and strategic planning and resource allocation. He leads the firm's research activities in valuation and capital markets. Before joining McKinsey, he worked with Stern Stewart & Company and with Mobil Corporation. He received his MBA from the University of Chicago.

Marc Goedhart is a senior expert in McKinsey's Amsterdam office and an endowed professor of corporate valuation at Rotterdam School of Management, Erasmus University (RSM). Over the past 25 years, Marc has served clients across Europe on portfolio restructuring, M&A transactions, and performance management. He received his PhD in finance from Erasmus University.

David Wessels is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. Named by Bloomberg Businessweek as one of America's top business school instructors, he teaches courses on corporate valuation and private equity at the MBA and executive MBA levels. David is also a director in Wharton's executive education group, serving on the executive development faculties of several Fortune 500 companies. A former consultant with McKinsey, he received his PhD from the University of California at Los Angeles.

Corporate Valuation

A Practical Approach with Case Studies

• © 2023
• Benedicto Kulwizira Lukanima 0

Department of Finance and Accounting, Universidad del Norte, Barranquilla, Colombia

You can also search for this author in PubMed   Google Scholar

• Provides students with basic knowledge and advance skills for addressing some practical challenges in valuation
• Features case studies, practical, reflective and review questions, and web links
• Features slides, quizzes, Microsoft Excel illustrations, working data and sample syllabi online for download

Part of the book series: Classroom Companion: Business (CCB)

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Table of contents (22 chapters)

Front matter, the concept of value, existence of a firm, and the objective value maximization, an overview of corporate valuation.

Benedicto Kulwizira Lukanima

Corporate Value Creation

Time value of money, security markets and valuation, financial information as a source of valuation inputs, an overview of financial information, the basics of financial statement analysis, profitability analysis, financial leverage analysis, market perception analysis, free cash flows, the cost of capital, an overview of capital structure and cost of capital, the cost of equity, the cost of debt, intrinsic valuation, estimating growth rates, free cash flow discount models: cost of capital approach.

• Corporate finance
• Corporate valuation
• Value maximization
• Cost of capital
• Intrinsic valuation
• Equity valuation
• Firm valuation
• Investment decision
• Financial statement analysis
• Intrinsic value
• Relative value
• market value
• valuation challenges
• valuation techniques
• value creation
• free cash flow

About this book

This book provides students with basic knowledge and advance skills for addressing practical challenges in valuation. First, the book presents financial information as a vital ingredient for performing corporate valuation. Second, the book presents key concepts of value and valuation and basic techniques for cash flow discounting. Third, the book offers an understanding of the reality of valuation, not simply as a numerical subject, as most people tend to think, but as a combination of objective and subjective aspects. Finally, it examines valuation in relation to the linkage between a firm’s objective, management role in value creation, investors’ decisions, and the valuation role of financial information.

This book is designed and presented to make valuation easily accessible while also not diluting the nature of its complexity. To assist in the learning experience, the author provides illustrative case studies using real world data and review questions tocover all concepts. To assist professors, slides, Microsoft Excel illustrations, working data and sample syllabi are available online for download.

Authors and Affiliations

About the author.

Benedicto Kulwizira Lukanima is Assistant Professor in the Department of Finance and Accounting at Universidad del Norte (Barranquilla, Colombia).

Bibliographic Information

Book Title : Corporate Valuation

Book Subtitle : A Practical Approach with Case Studies

Authors : Benedicto Kulwizira Lukanima

Series Title : Classroom Companion: Business

DOI : https://doi.org/10.1007/978-3-031-28267-6

Publisher : Springer Cham

eBook Packages : Economics and Finance , Economics and Finance (R0)

Copyright Information : The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023

Hardcover ISBN : 978-3-031-28266-9 Published: 05 August 2023

Softcover ISBN : 978-3-031-28269-0 Due: 05 September 2023

eBook ISBN : 978-3-031-28267-6 Published: 04 August 2023

Series ISSN : 2662-2866

Series E-ISSN : 2662-2874

Edition Number : 1

Number of Pages : XXVI, 705

Number of Illustrations : 14 b/w illustrations, 166 illustrations in colour

Topics : Business Finance , Financial Accounting , Financial Services , Macroeconomics/Monetary Economics//Financial Economics

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A case study focuses on a particular unit - a person, a site, a project. It often uses a combination of quantitative and qualitative data.

Case studies can be particularly useful for understanding how different elements fit together and how different elements (implementation, context and other factors) have produced the observed impacts.

There are different types of case studies, which can be used for different purposes in evaluation. The GAO (Government Accountability Office) has described six different types of case study:

1.  Illustrative : This is descriptive in character and intended to add realism and in-depth examples to other information about a program or policy. (These are often used to complement quantitative data by providing examples of the overall findings).

2.  Exploratory : This is also descriptive but is aimed at generating hypotheses for later investigation rather than simply providing illustration.

3.  Critical instance : This examines a single instance of unique interest, or serves as a critical test of an assertion about a program, problem or strategy.

4.  Program implementation . This  investigates operations, often at several sites, and often with reference to a set of norms or standards about implementation processes.

5.  Program effects . This examines the causal links between the program and observed effects (outputs, outcomes or impacts, depending on the timing of the evaluation) and usually involves multisite, multimethod evaluations.

6.  Cumulative . This brings together findings from many case studies to answer evaluative questions. 

The following guides are particularly recommended because they distinguish between the research design (case study) and the type of data (qualitative or quantitative), and provide guidance on selecting cases, addressing causal inference, and generalizing from cases.

This guide from the US General Accounting Office outlines good practice in case study evaluation and establishes a set of principles for applying case studies to evaluations.

This paper, authored by Edith D. Balbach for the California Department of Health Services is designed to help evaluators decide whether to use a case study evaluation approach.

This guide, written by Linda G. Morra and Amy C. Friedlander for the World Bank, provides guidance and advice on the use of case studies.

Expand to view all resources related to 'Case study'

• Broadening the range of designs and methods for impact evaluations
• Case studies in action
• Case study evaluations - US General Accounting Office
• Case study evaluations - World Bank
• Comparative case studies
• Dealing with paradox – Stories and lessons from the first three years of consortium-building
• Designing and facilitating creative conversations & learning activities
• Estudo de caso: a avaliação externa de um programa
• Evaluation tools
• Methods for monitoring and evaluation
• Reflections on innovation, assessment and social change processes: A SPARC case study, India
• Toward a listening bank: A review of best practices and the efficacy of beneficiary assessment
• UNICEF webinar: Comparative case studies
• Using case studies to do program evaluation

'Case study' is referenced in:

• Week 32: Better use of case studies in evaluation

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• 22 Mar 2024
• Research & Ideas

Open Source Software: The $9 Trillion Resource Companies Take for Granted

Many companies build their businesses on open source software, code that would cost firms $8.8 trillion to create from scratch if it weren't freely available. Research by Frank Nagle and colleagues puts a value on an economic necessity that will require investment to meet demand.

• 06 Dec 2021

The Popular Stock Metric That Can Lead Investors Astray

Investors may rely too heavily on a financial measure that no longer reflects the economic fundamentals of modern business. What should investors do? Research by Charles C.Y. Wang and colleagues. Open for comment; 0 Comments.

• 31 Mar 2018
• Working Paper Summaries

Expected Stock Returns Worldwide: A Log-Linear Present-Value Approach

Over the last 20 years, shortcomings of classical asset-pricing models have motivated research in developing alternative methods for measuring ex ante expected stock returns. This study evaluates the main paradigms for deriving firm-level expected return proxies (ERPs) and proposes a new framework for estimating them.

• Harvard Business School →
• Faculty & Research →
• May 2020 (Revised October 2021)
• HBS Case Collection

Valuing Peloton

• Format: Print
• | Language: English
• | Pages: 12

About The Author

E. Scott Mayfield

Related work.

• May 2020 (Revised November 2021)
• Faculty Research
• Valuing Peloton  By: E. Scott Mayfield

Breaking News: FINCAD is now Numerix. LEARN MORE

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If you are evaluating valuation and risk solutions, I would encourage you to check out the vendor’s case studies. While items like brochures, product demos, and website content are useful in helping you understand solution offerings, a good case study will give you valuable insight into real-world use cases and results of the system you might be considering.

If the vendor has a healthy library of case studies available—even better. You should be able to pinpoint at least a couple that will give you a good idea of how other firms solved the same challenges you face. 

At FINCAD, we provide numerous case studies to our clients and prospects. Since we offer different solutions to both buy- and sell-side institutions, we provide a diverse set of case studies that showcase how clients are using our solutions to overcome their biggest valuation and risk challenges. Below are a five popular FINCAD case studies showing how different firm types are getting results with our solutions. Hopefully one (or more) will resonate with you. 

1. Mitsubishi UFJ Financial Group (MUFG) Case Study

Industry : Bank holding and financial services company

Business Objective: Adopt an accurate, efficient solution for CVA reporting, necessary to meeting Basel III requirements

Requirements: MUFG required a CVA provider that not only offered the right technology, but also a complete service for handling the regulatory reporting process from beginning to end.

Results: Using FINCAD, MUFG simplified Basel III CVA reporting, saving considerable time by outsourcing the process to FINCAD’s Professional Services team. Read more about MUFG .

2. Arca Vita Case Study

Industry:  Life insurer

Business Objectives: Introduce powerful analytics libraries, model structured bonds and perform scenario analysis

Requirements: Arca Vita required an easy-to-use and highly reliable software solution that could easily integrate with Excel and other existing systems.

Results: Arca Vita gained flexible curve-building, the ability to constantly monitor portfolios, and perform detailed ALM and scenario analysis. Read more about Arca Vita . 

3. KPMG South Africa Case Study

Industry: Audit, tax and advisory services

Business Objective: Accelerate derivative valuations for banking and corporate clients

Requirements: KPMG required an Excel-based valuation and risk solution backed by a trusted provider that could help them perform timely valuations of complex derivatives.

Results: Leveraging FINCAD’s fast and accurate audit valuation and validation results, KPMG has been able to significantly reduce modeling and computation time, and reliance on internal development resources. Read more about KPMG .

4. First Swedish National Pension Fund Case Study

Industry: Pension fund

Business Objective: Gain access to a powerful analytics library for pricing bonds and yields, able to integrate with an existing investment management application

Requirements: First Swedish National Pension Fund required an analytics library for generating bond and yield calculations. The firm also wanted a solution with a robust development toolkit to help developers build out the application.

Results: First Swedish National Pension Fund accelerated accurate bond pricing and yield calculations, and boosted efficiency through using FINCAD’s prebuilt market conventions. Read more about First Swedish National Pension Fund .

5. Frame Financial Case Study

Industry: FinTech provider of pricing and risk analytics solutions

Business Objective: Provide a key client, Kensington Capital Advisors, and other firms with a solution offering flexible deployment and custom work flows integrated with fast and sophisticated pricing and risk analytics

Requirements: Frame Financial sought a valuation tool providing powerful analytics and flexible architecture for ease of custom solution development.

Results: Using FINCAD, Frame Financial was able to effectively meet the demands of client, Kensington Capital Advisors, giving them the ability to price and analyze diverse portfolios together within a single platform. Read more about Frame Financial . 

Interested in reading more FINCAD case studies?  Check out our full case study library . 

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Case Study: Valuation Adjustment (XVA)

Valuation adjustments (XVA)s have grown both in size and complexity over the last decade. Can your XVA platform meet the requirements of new regulations?

XVA from S&P Global delivers deal-time insights to the front office XVA desk with a comprehensive view of the valuation adjustments arising from counterparty credit risk, funding, collateral, and regulatory capital.

Background of study

A bank’s ability to run a profitable derivatives business depends on knowing all the costs involved in trading derivative contracts. These valuation adjustments (XVA)s have grown both in size and complexity over the last decade driven by new regulations such as bilateral initial margin and regulatory risk capital.

This changing landscape is driving existing credit valuation adjustment (CVA) systems into obsolescence as they struggle to meet requirements that they were never designed to cover.

A leading global investment bank looked to upgrade its XVA platform to have a complete and accurate picture of the true profit and loss (P&L) associated with potential deals. The bank realized their peers were generally pricing in counterparty credit risk and funding costs in their trades and the firm wanted to go further and include collateral and margin valuation adjustments and the impact of the standard approach credit valuation adjustment (SA-CVA) risk capital. For SA-CVA, the firm wanted to ensure that their book had an attractive return on capital after the regulation came into force. That meant looking at the capital impact of any trades since 2022.

The bank required this information to be delivered fast enough to drive traders’ decisions and cover their entire derivatives portfolio. Knowing how costs change under market moves through their sensitivities was also crucial so that those risks can be hedged.

S&P Global Market Intelligence provides solutions to financial institutions supporting risk management, risk regulatory capital and derivative valuation adjustments. It offers a specific solution for XVA desks delivering deal-time insight to the front office along with a comprehensive view of the valuation adjustments arising from counterparty credit risk, funding, collateral, and regulatory capital.

In the fast and furious world of trading, having the latest software is key to gaining a business advantage. The technology underpinning the XVA solution by S&P Global Market Intelligence allows trade level valuations generated in the batch Monte Carlo simulation to be stored in a distributed file system and re-used when calculating pre-deal XVA. This makes it unnecessary for firms to re-run valuations for existing trades. Another advantage of the solution is the ability to allocate XVAs back to individual trades through Euler allocation.

S&P Global’s investment in new technologies such as open-source big data and cloud computing means clients can tackle the computational challenge of calculating all XVAs in one system. In addition, using agile development practices with fortnightly sprints enables continuous integration and frequent releases to production.

The bank installed the S&P Global Market Intelligence XVA solution to gain access to a complete view of the valuation adjustments supporting pre-deal and what-if analysis so traders could accurately price trades and explore the impact on price from changing deal terms or selecting different dealers/ central counterparty (CCPs) to place hedge trades.

Before using the XVA solution, the bank had a lengthy procurement cycle for physical hardware on premise. Now, they can leverage cloud providers such as AWS or Azure to secure computing resource instantaneously. This has revolutionized their ability to deliver technology solutions to their business users.

Clients can tackle the computational challenge of calculating all XVAs in one system.

Using the XVA solution by S&P Global Market Intelligence, means the bank no longer needs to re-run time consuming valuations for a counterparties’ existing trades. Only new trades need to be valued on the simulated paths and a complete set of XVAs can be returned to the user in under a minute giving unparalleled insight into the costs of trading. For other types of what-if request such as novating trades or changing the terms of collateral agreements, the calculation can be handled by simply re-aggregating the stored data, providing fast and compute-efficient results.

Being able to calculate the impact of a new trade on counterparty and enterprise-level valuation adjustments is an enormous benefit to a bank and means that the bank has an accurate view of a trade’s contribution to balance sheet costs before committing to a trade. Over time, this will mean it can accumulate positions that show good return on investment allowing them to outperform their peers.

With the XVA solution, the bank now has a complete picture of their valuation adjustments, including SA-CVA risk capital. This has given them a competitive advantage in the market.

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Over a 25-year career, Karl has developed and delivered a variety of front-office and risk products. Since 2005 he has worked in the City of London holding senior positions at Rabobank International and Mitsubishi UFJ Financial Group (MUFG). Karl is the Product Owner of S&P Global's XVA Hosted Risk Service which he has overseen from inception through to its market launch in 2020.He holds a BSc Hons degree in Physics from Lancaster University and a MSc in Medical Physics from the University of Aberdeen.

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Business Valuation Case Study: Cash Flow is King

Case Background

The business in question was a sole proprietorship that provided “sales, repair, and installation” services to homes and businesses. The business operated out of a 2,500 square foot shop located at the owner’s residence. The business did not pay rent for use of the facilities, did not pay a salary to the owner for his services, but did pay a small wage to the spouse. The business had a consistent revenue stream, but profitability varied year to year.

Approaches Used

The opposing valuation expert (Expert A) relied solely on the Privately Traded Guideline Company Method to determine the value of the business . Expert A used the Pratt’s Stat’s – Private Company Merger and Acquisition database to search for transactions involving companies deemed similar to the subject business. Using search criteria of similar NAICS codes, a comparable range of revenue, and a timeframe of the previous 10 years to the effective date of the valuation, Expert A found 38 transactions involving companies deemed comparable to the subject business. Using these 38 transactions, Expert A determined that the mean (average) sales multiple was 0.73. Expert A then multiplied this sales multiple by an average of the previous 3 years sales to arrive at the estimated enterprise value of the business of approximately $432,000.

I also used the Privately Traded Guideline Company Method in my valuation, and the same historical data as Expert A, but made normalization adjustments to the income statements to account for the market rate rent expense for the shop, estimated market level compensation of the owner based upon services performed, and removed compensation paid to the spouse which would not be required for operation of the business. I also used the Pratt’s Stat’s database and similar search criteria. My search resulted in 40 transactions which included all 38 transactions that Expert A used. In addition, I chose the Seller’s Discretionary Earnings (SDE) multiple and the sales multiple as the two multiples to use in my valuation. According to Pratt’s Stats FAQ, it defines SDE as Operating Profit (Earnings Before Interest and Taxes) + Owners Compensation + Depreciation/Amortization. I believe that SDE closely resembles the earnings stream available to a purchaser of the business and thus is the more relevant multiple.

By way of example, my report stated,

“If you have two similar companies that both generate $500,000 in net sales annually, but Company A produces cash flow available for distribution to an owner of $150,000 while Company B produces $25,000, Company A will be more valuable than Company B regardless of the top line revenue. Using a net sales multiple alone does not account for the differences in profitability of the companies in the sample, unless the revenue multiple selected represents comparable profitability to the subject company.”

I calculated the normalized SDE for the subject company (considering the normalization adjustments discussed previously) and then calculated the SDE as a % of sales for the subject company. This percentage was then compared to the SDE as a % of sales for the transactions in my search. The results were the subject company’s normalized SDE as a percentage of sales approximated the SDE as a % of sales in the 21st percentile of the transactions in my search. The SDE multiple for the 21 st percentile associated with the transactions was 1.93 times SDE. I also calculated the sales multiple for the 21 st percentile which was 0.41 times revenue. By using these two multiples to calculate the estimated enterprise value of the business, the end result was approximately $145,000.

My approach considered the bottom line cash flow available to a potential purchaser of the business and used multiples corresponding to transactions with similar levels of cash flow. My report highlighted that top line measures of profitability, such as revenue, should be supported with an analysis to show its relationship with bottom line cash flow measures. Simply put, if the “mean” multiple for revenue should be used, then the bottom line cash flow available to a purchaser of the business should approximate the “mean” cash flow of the data set. Within these transactions it did not, and I believed a different multiple should be used.

The judge on the case heard arguments from both sides and due to the disparity in results called for a 3 rd independent valuation expert to review both reports and state to the court which approach they believed was more credible. The 3 rd expert testified that they would have valued the company using a bottom line cash flow approach that considered normalization adjustments similar to ones used in my report. When asked if they would have used the “mean” revenue multiple, they stated that they would only have used it if the bottom line cash flow approximated the “mean” of the data set for the transactions considered. The judge ruled in favor of my valuation report.

Visit our webpage for more information on McKonly & Asbury’s Business Valuation Services . Should you have questions about the importance of the cash flow available to a purchaser of a business, or business valuation in general, don’t hesitate to contact me, T. Eric Blocher CPA, ASA, CVA at [email protected] .

About the Author

McKonly & Asbury is a Certified Public Accounting Firm serving companies across Pennsylvania including Camp Hill, Lancaster, Bloomsburg, and Philadelphia. We serve the needs of affordable housing, construction, family-owned businesses, healthcare, manufacturing and distribution, and nonprofit industries. We also assist service organizations with the full suite of SOC services (including SOC 2 reports), ERTC claims, internal audits, SOX compliance, and employee benefit plan audits.

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Real-World Case Studies to Help You Understand Stock Market Valuation Fundamentals

• December 27, 2022

The stock market can seem like a murky, complicated world of numbers and figures. But the truth is, once you understand the basics, it becomes much easier to explore the different types of stocks on the market.

Stock market valuation is an essential part of investing in stocks . It can change over time as well as across different regions. Here are some case studies that you’ll want to read if you’re new to investing or are trying to better your understanding of the fundamentals.

• Investing Lessons from Test Match Cricket
• Bombay Stock Exchange – Case study
• Game stop Stock Price Movements – Case study
• Indian IT companies valuation – Case study

What are different case studies to help with stock market valuation

Above are four different case studies that can help in understanding stock market valuation. Each one includes a detailed explanation of the fundamentals, in addition to the end goal.

For example, in one study they talk about how Indian IT companies are valued. They include everything from revenue, profit margins, and growth rates to identify which companies are worth investing in. Every company is different, so it’s important to read through these case studies to determine which one best applies to your situation.

Power of Compounding in Stock Market

One of the primary concepts to understand in stock market valuation is the power of compounding .

This case study illustrates how investing can affect your stock market valuation. For example, if you invest $100 at the start of year 1 and then $200 at the start of year two, this would lead to a compounded growth rate of 100% over the course of three years.

What this means for your investment portfolio is that even if you don’t make any additional investments, your portfolio’s value will still continue to grow. This concept applies to understanding how much money you need to save for retirement or other goals.

When you buy stocks, the value of your stock can change depending on what you paid for it. But there are also other factors that affect the price – like the interest rates, economic growth, or how much demand there is for a specific product or service. One factor to keep in mind is compounding.

Compounding is an investment term that means earning interest the more often it’s compounded. The more frequently your money earns interest, the higher your potential earnings will be. To take advantage of this power, you should invest in stocks that have a high annual rate of return.

If you’ve invested in stocks that aren’t earning as much, then your money will grow slower because it’s not getting reinvested at a high enough rate.

Investing Lessons from Test Cricket

One way to understand the fundamentals of valuation is by looking at stock market movements in different industries.

Cricket is one industry that illustrates this well. One reason for this may be the long-term perspective of cricket – all matches are five days, which contrasts with other popular sports, like football or basketball, where games are often measured in minutes rather than hours. This longer time-frame seems to lead to more stable stock price movements.

If you’ve ever watched a cricket match – or even the show “Cricket 24×7” on ESPN 3 – you’ll know that it’s one of the most unpredictable sports. The game is played over five days, with each team having one innings, or turn to bat. It can be difficult to predict the outcome of the game because anything could happen in between – rain delays, time-outs, and even scorecard disputes. But if you look at how teams fare historically after they’ve had two innings to bat, you’ll notice something interesting:

The team batting second has won more than twice as many matches as those batting first.

This is a valuable lesson for those looking to invest in stocks. It can be tough to predict what will happen as companies grow and change over time, but it’s helpful to look at their past financial performance and see if they’re trending upwards or downwards. Those who have been on a losing streak for some time may just need a break to get back on top of their game. And those who have been successful might be worth investing in right now before they take off.

Bombay Stock Exchange

The Bombay Stock Exchange (BSE) is a major Indian stock exchange. It was established in the 1800s and has been operating since then. It was incorporated with the Securities and Exchange Board of India with the passing of the Securities and Exchange Board of India Act in 1988.

The BSE has seen many fluctuations in its share prices. In 2011, the index peaked at over 25,000 points only to drop down to under 15,000 points by 2013. But since then it has recovered and is currently hovering around 23,000 points.

It has been calculated that the BSE’s market capitalization as of October 2017 was just over 1 trillion US dollars.

In a separate post, we also cover about London Stock Exchange specifically around it history and impact on the overall financial markets. 

Gamestop Stock Price Movements

Gamestop has been a popular choice for game enthusiasts and those who enjoy the traditional video game store experience. Gamestop is a retail company that sells new and pre-owned video games, consoles, and accessories, in addition to other items related to gaming.

Gamestop is an American video game and electronics retailer. Gamestop has been struggling in recent years, not just because of a shift in the market but also because they have made some mistakes. In particular, Gamestop has been slow to adapt to the rise of mobile gaming and digital downloads.

Gamestop has faced stiff competition in recent years from online retailers like Amazon and also brick-and-mortar stores like Best Buy. This has resulted in lower profit margins for Gamestop than at its peak in 2006.

In 2015, Gamestop stock prices dropped by 20%. The company has lost over $1 billion in market cap in 2017 alone. In November 2017, shares were down by 5% to $14.30 per share. Gamestop’s management team has acknowledged the difficulties the company faces, but insists that it will be able to turn things around with new leadership and investments in technology.

NSE 20 stocks that have shown a positive growth in the past 12 months

1. HERO MOTOCORP LTD

2. TATAELXSI LIMITED

3. SUN TV NETWORK LTD

4. BHARAT FORGE LIMITED

5. VEDANTA LTD

6. HINDUSTAN UNILEVER LTD

8. SBI CAPITAL MARKETS LIMITED

10. GAIL (India) Ltd

11. BANK OF MAHARASHTRA

12. ASIAN PAINTS INDIA LIMITED

13. CEAT LIMITED

14. COAL INDIA LTD

15. CANARA BANK

16. IRB INFRA ENGINEERS LTD

17. GAIL (INDIA) LIMITED

18. IDFC FIRST BANK LIMITED

19. L&T HOLDINGS LTD

20. RELIANCE COMMUNICATIONS

When it comes to learning the fundamentals of the stock market, you’ve got a lot of options.

And with so many options, it can be hard to know which one is the right one for you.

Case studies can help you learn about the basics of stock market investing and valuation, but they don’t tell the whole story.

The best way to learn is by doing. Start investing in stocks to see the power of compounding in action for yourself!

Stock market valuation is a complex subject. There are many factors that contribute to a company’s worth, and this makes it difficult to assess a set value. To help you understand, we have compiled a list of case studies that can teach you about stock market valuation.

In this article, we have discussed different case studies to help with your understanding of the stock market valuation. The lesson from Gamestop is an example of how a company can fail in spite of a high valuation due to the lack of expected growth. In order to avoid this, it’s important to have a clear understanding of what your company can offer in terms of growth.

You also need to consider the other factors that go into the equation, such as management quality and their ability to execute on a vision. And while valuation might seem like a difficult subject to wrap your head around, the case studies we’ve discussed here should help you get started.

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