Which valuation method typically provides a lower valuation for a company?

The leveraged buyout (LBO) valuation method typically provides a lower valuation for a company compared to other methods. This is primarily because an LBO analysis focuses on the cash flows available to service debt that will be taken on to finance the acquisition of the company. The analysis is often conservative, emphasizing the need for the cash flows to cover debt repayments.

In an LBO context, value is derived from the net present value of these cash flows, which may be lower than valuations derived through discounted cash flow (DCF) analyses that take a broader view of potential future earnings without the burden of heavy debt. The LBO method often assumes a lower growth rate and prioritizes near-term cash flow stability over long-term growth potential, leading to a conservative estimate of value.

In contrast, the discounted cash flow method typically provides a more comprehensive view of the company's potential to generate cash in the future, which often results in a higher valuation. Comparables analysis relies on market multiples which can reflect inflated valuations in overheated markets, while liquidation valuation focuses on the asset base's worth in a worst-case scenario, often yielding a value higher than what LBO models produce. Thus, the nature of the LBO method and its debt-centered approach inherently leads to lower valuations