How bankers value a company
7 min read · updated July 2, 2026
Ask a banker "what's this company worth?" and the honest answer is a question back: worth to whom? There is no single number. A company is worth different amounts to a public-market investor, to a strategic acquirer, and to a private equity fund, because each one is buying a different thing. So bankers don't hand a client one value. They run a handful of methods, each answering a different question, and present a range.
That's the whole game. Learn the four tools, learn what question each one answers, and learn why they disagree.
The four tools
Every valuation you'll build in banking is some combination of these.
1. Trading comparables
Trading comps ask: what are investors paying today for similar public companies? You pick a peer set (same industry, roughly the same size, similar growth and margins), pull each peer's enterprise value relative to a metric like EBITDA, and apply that multiple to your company. It's a market snapshot. Fast, current, and grounded in real prices people are actually paying.
The catch: the market can be wrong about the whole sector at once, and you're borrowing its mood.
2. Precedent transactions
Same idea, but instead of today's stock prices you use the prices paid in past M&A deals for similar companies. What did an actual acquirer pay to own the whole thing? See precedent transactions for the full method.
3. The DCF
The DCF ignores the market entirely and asks: what is this business worth based on the cash it will generate itself? You project unlevered free cash flow, discount it back, and add a terminal value. It's the one intrinsic method in the kit. We break it down in the DCF explained.
4. The LBO floor
An LBO analysis flips the question around: what could a private equity sponsor pay and still hit its return target (usually a 20%-ish IRR)? A sponsor doesn't care about "fair value." It cares about the most it can pay and still make its money back with a profit. That maximum sits below what a strategic buyer would pay, because the sponsor has no operating synergies to justify a richer price. So the LBO tends to set the floor of the range. The LBO and paper LBO walks through the mechanics.
Intrinsic vs. relative: two different questions
Group the tools and a cleaner picture appears.
The DCF is intrinsic. It values the company off its own cash flows, in a vacuum, indifferent to what anyone else is trading at. If the whole market is euphoric, a DCF doesn't care.
Comps and precedents are relative. They value the company by comparison: what's the market paying for the peer next door, what did buyers pay for the target last year. They inherit whatever the market is feeling right now, good or bad.
Intrinsic and relative methods answer different questions, so they should diverge. When your DCF sits far above your comps, that's not an error to "fix." It's information: either the market is skeptical of the growth you baked into your model, or you're seeing something the market hasn't. Figure out which. The gap is the interesting part.
Why precedents usually run higher
Here's a pattern that trips up beginners. Precedent transaction multiples almost always come in above trading comp multiples for the same company. The reason has a name: the control premium.
When you buy a single share on the open market, you own a passive sliver. You can't change the strategy, swap the CEO, or capture cost savings. Trading comps are built from those passive, minority prices.
But an acquirer buying the entire company gets control. It can fire redundant staff, combine facilities, cross-sell products, refinance the debt. Buyers pay up for that control and those synergies, typically 20% to 40% over the undisturbed trading price. Precedent transactions bake that premium in. Trading comps don't. That's the structural reason the two sit at different heights, and it's a classic interview question.
Triangulating the range: the football field
So you've got four methods spitting out four different ranges. You don't average them into one number. You lay them side by side on a football field, a bar chart where each method is a horizontal bar spanning its low-to-high range.
Now you can see the story. Where the bars overlap, you have a defensible value range. Where they diverge, you have a conversation: why does the DCF say more than the market? Is the LBO floor uncomfortably close to the current price? For an M&A sale, the football field is how a banker frames the negotiation, "here's the range the buyer should expect to pay, and here's why."
Expecting one "right" value and treating the spread between methods as a mistake to be reconciled away. It isn't. Bankers present a range on purpose. And the methods are supposed to disagree: precedent transactions include a control premium, so they naturally sit above trading comps, and an LBO analysis usually marks the floor. If a candidate says "the company is worth $500 million" as a single point, that's a tell they've never built a real valuation. The right answer is "somewhere in the $450 to $550 million range, and here's what drives the top and bottom."
A worked feel for it
Say a company does $100 of EBITDA. Trading comps for the peer set run at 8x EV/EBITDA, so that method centers around an EV of $800. Precedent deals in the space happened at 10x (buyers paid a control premium), pointing to $1,000. Your DCF, depending on the growth and discount rate you assume, lands somewhere between $850 and $950. An LBO says a sponsor could pay up to about $750 and still clear its return hurdle.
Line those up: roughly $750 on the low end (the LBO floor) up through $1,000 (precedents, with control baked in). The heart of the range, where comps and the DCF agree, sits around $800 to $950. That's your answer. Not a point. A range with a spine.
Note how EV pairs with EBITDA in every one of those multiples, never equity value. That's deliberate: EBITDA is a pre-interest number, so it belongs with the capital-structure-neutral EV. If you're shaky on why, read enterprise value vs. equity value before your interview, because getting that backwards unravels everything downstream.
When they ask "how would you value this company?", don't list methods like a menu. Sequence them and say what each one does: "I'd run trading comps for the current market read, precedent transactions to capture what a buyer would pay with a control premium, and a DCF for intrinsic value, then triangulate on a football field. If a sponsor's in play I'd add an LBO to set the floor." Twenty seconds, delivered in that order, tells the interviewer you've actually built these and know why each exists. That structural fluency, the ability to explain not just the tools but how they fit together, is the depth that separates you in a Superday.
Glossary
New to the lingo? Every term used above, in plain English.
- DCF (Discounted Cash Flow)
- A way to value a company by projecting its future cash and discounting it back to what it is worth in today’s dollars.
- Trading comps
- Comparable companies analysis. You value a company by looking at the multiples that similar public companies trade at right now.
- LBO (Leveraged Buyout)
- Buying a company using mostly borrowed money, then using the company’s own cash flow to pay that debt down over time. The classic private equity playbook.
- EV (Enterprise Value)
- The value of a company’s whole operations, to every investor including lenders and shareholders. It does not depend on how the company is financed.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough proxy for a company’s operating cash profit, before financing and accounting choices.
- Terminal Value
- In a DCF, the estimated value of all the cash flows that come after the years you forecast explicitly. It often makes up most of the total value.
- Football field
- The summary chart that stacks the valuation range from each method (comps, precedents, DCF, LBO) as horizontal bars, so you can see where they overlap.
- Sponsor
- A private equity firm. In an LBO the sponsor is the buyer that puts up the equity and controls the company.
- IRR (Internal Rate of Return)
- The annualized percentage return on an investment, which accounts for how long the money was tied up. Private equity firms often target an IRR of around 20%.
- Synergies
- The extra value two companies expect to create by combining, usually cost savings or added revenue that neither could achieve alone.
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