Once you understand that valuation is more of a range of possibilities than a final answer, the next question naturally becomes: Which method should you actually use to build that range?
The truth is, there is no one-size-fits-all approach. Different situations call for different methods. A private equity buyer won’t rely on the same valuation logic as a public market investor. A tech startup without profits can’t be valued the same way as a stable utility company. A board looking for a fairness opinion needs a different level of analysis than an investor looking to make a quick decision.
This is why one of the most valuable skills in investment banking is knowing when to use which method, and just as importantly, why. In this article, we’ll break down the practical thought process bankers follow when deciding how to value a business, depending on the deal type, industry, data availability, and client expectations.
Why You Can’t Rely on Just One Method
Imagine you’re advising a client on selling their company. You’ve built a DCF, pulled public comps, gathered precedent M&A deals, and maybe even run an LBO analysis if private equity buyers are involved. At this point, you have four different models giving you four different answers. None of them are exactly the same. Some are higher. Some are lower. Some feel more realistic. Some feel overly optimistic.
This is the moment where junior bankers often get stuck, asking:
Which one is right?
The answer is: none of them are perfect on their own. That’s why you never rely on just one method. Instead, you weigh them based on the situation you are dealing with. Some methods carry more weight because they fit the deal context better. Others serve more as cross-checks or sanity checks.
For example, if you are working on a private company sale, DCF and Precedent Transactions might carry more weight because there are no public market prices to reference. On the other hand, if you are working on a high-profile IPO, public market Comps often become the anchor, because investors will compare the new listing to similar public companies.
Choosing the right method is part technical skill, part market judgment, and part client management. The goal is to build a valuation story that feels reasonable, defensible, and aligned with how the market is likely to see the business.
How the Deal Type Influences the Method Choice
Not all deals are the same, and the type of transaction you’re working on often defines which valuation methods should come first. Some deals are all about convincing a strategic buyer. Others are about preparing a company to face the public markets. Some are about proving fairness to shareholders. Each situation shapes the valuation approach.
Take Mergers and Acquisitions (M&A), for example. When a company is selling itself or buying another company, the valuation needs to reflect what a buyer is realistically willing to pay. This is why bankers often lean on Precedent Transactions Analysis in M&A deals. Looking at prices paid in similar acquisitions gives the client a real-world benchmark for what buyers have paid in the past. But that’s not enough on its own. You also build a DCF to show the company’s standalone value, especially if the seller wants to argue for a higher price. And if private equity buyers are part of the process, you’ll almost always run an LBO model to understand what a financial buyer could afford to pay using debt.
Now think about an Initial Public Offering (IPO). Here, the key audience is the public market investors, not a single buyer. This is why Comparable Company Analysis usually takes the lead. You need to understand how similar public companies are trading so you can position your client’s stock at the right price range. A DCF might still be built to show the company’s intrinsic value, but in reality, IPO pricing leans heavily on how the market values peers today.
In a Fairness Opinion, the valuation needs to be defensible in court or to shareholders. This means you typically include all methods—DCF, Comps, Precedents, and sometimes even LBO or SOTP if relevant. The goal here is not just to find a price but to show that you’ve looked at all reasonable angles to support the fairness of the deal.
In restructuring or debt advisory, valuation focuses more on downside risk. You might run liquidation analyses or distressed valuation models, which are very different from growth-focused DCFs or market comps.
This is why understanding the deal context is the first step in choosing your methods. You are not just building models—you are building a valuation story that fits the specific deal you are working on.
How Industry and Company Profile Shape the Valuation Approach
The type of industry and the specific profile of the company you are valuing can make a big difference in choosing the right methods. A fast-growing tech startup and a stable energy utility might both be worth $1 billion on paper, but you wouldn’t value them the same way.
Let’s start with high-growth companies, like tech startups. These businesses often have little or no profit today but huge future potential. Trying to value them based on traditional profit multiples—like price-to-earnings—doesn’t make sense if earnings are negative or too small. This is where DCF becomes a useful tool because you can focus on future cash flows rather than current profits. You might also look at revenue multiples, which are more commonly used for high-growth sectors where profit is still years away.
On the other hand, in mature industries like utilities, real estate, or manufacturing, profits and cash flows tend to be stable and predictable. Here, market participants often focus on profitability multiples, like EV/EBITDA or P/E ratios. Comps and Precedents in these sectors tend to be more reliable because the businesses have steady financial profiles and comparable companies are easier to find.
In cyclical industries, like oil and gas or mining, valuations are more complicated because profits swing wildly based on commodity prices. In these cases, bankers often look at long-term average multiples or asset-based valuations like Net Asset Value (NAV), especially if the company’s value depends on reserves or physical assets rather than future profits.
The size and stage of the company also matters. Small private companies may not have clean financial data or reliable forecasts, making market-based methods like Comps or Precedents more practical than a detailed DCF. Large, established public companies usually have enough data to build full DCF models and run deep benchmarking against peers.
In short, the nature of the industry and the quality of available data shape the way you approach valuation. The goal is always to apply methods that make sense for the business model, reflect market reality, and are defensible to the client or investors.
How Data Availability and Market Conditions Influence Your Options
Valuation depends on the data you actually have. Some companies, especially private ones, might not have reliable forecasts. Others might operate in industries with no clear public peers or recent transactions. These limitations force bankers to adapt their approach.
For example, if you are valuing a small private business, you might not have detailed financial projections from the management team. That makes building a DCF much harder, if not impossible. In these situations, market-based methods like Comparable Company Analysis or Precedent Transactions become more useful because they rely on external market data rather than internal forecasts.
Similarly, if you’re working on a deal in a niche industry with very few comparable companies or past transactions, your comps and precedents may be too limited or unreliable. In that case, you might lean more on DCF or asset-based valuations, even if those models require more assumptions.
Market conditions also play a big role. In a bull market, when valuations are high across the board, relying too much on Comps or Precedents can lead you to overvalue a company if you don’t sanity-check the numbers. On the other hand, in a market downturn, these same methods might undervalue a solid business just because the market is pessimistic.
Bankers often build sensitivity analyses to reflect these market swings. For example, they might present a valuation range based on current market multiples, but also show what the range looks like if the market pulls back or recovers. This helps clients see the risks and manage expectations.
At the end of the day, valuation is about balancing what’s ideal with what’s practical. You have to use the methods that fit the data you have, while being honest about the limitations and market context.
How Bankers Combine Methods to Build a Defensible Valuation Story
In the real world, you rarely present just one method. Clients expect you to bring a complete view, showing how different methods line up—and where they don’t. Your job as a banker is to balance these methods, explain the trade-offs, and frame a valuation range that makes sense given the deal, the company, the industry, and the market.
For example, you might tell your client: "Based on Comparable Company Analysis, your business could be worth $90 million to $110 million. Recent M&A deals suggest a slightly higher range of $100 million to $120 million, while our DCF points to a $95 million to $115 million range. If a private equity buyer is involved, their LBO model likely caps their bid at around $100 million."
This is how you triangulate the valuation. You don’t just pick one number. You present the range, explain how each method fits the situation, and help the client understand what’s realistic based on market conditions and deal dynamics.
You also help the client position themselves. If they are selling, they might push for the top end of the range, especially if they believe there are strategic buyers willing to pay a premium. If they are buying, they might anchor the conversation at the lower end, arguing for a more conservative view of value.
What matters most is that your valuation story feels balanced, defendable, and grounded in professional judgment. This gives your client the confidence to move forward, negotiate effectively, and make decisions with their eyes wide open.
Closing Thoughts
Choosing the right valuation method is a technical decision and a judgment call that depends on the deal, the industry, the data, and the market. Good bankers know how to combine methods, explain the differences, and build a story that helps clients defend their position—whether they’re selling, buying, raising capital, or going public. In the next article, we’ll dive deeper into one of the most technical and commonly used methods: the Discounted Cash Flow (DCF). You’ll learn how it works, how to build it, and why even small changes in assumptions can have a big impact on the results.