The banker walks into the board: "the target is worth $140M, we valued it via DCF, comparables, and precedents." The number sounds precise. That is exactly the wrong word.
Valuation doesn't produce ONE number. It produces a RANGE. The three classic methods — DCF, comparables, precedents — give three different answers because they ask three different questions. When they converge, you have a strong case. When they diverge, that's where the real CFO work begins: understanding why.
This module teaches the three methods in their operational, not academic, form. When each one wins, when each one lies, and how the mature CFO triangulates them to defend a value band in the boardroom.
By the end of this module you'll have it down. Let's go.
Three valuation methods give: DCF $90M, comps $120M, precedents $160M. What do you tell the board?
In plain language
Before the mechanics, the four basic questions.
Why do this at all?
To have a defendable band for what something is worth, not an arbitrary number. In M&A, without rigorous valuation you pay the price the seller asks, not the price the economics justify. The difference between the two can be 30-50% of the deal price — millions transferred from buyer to seller without reason.
Who uses it?
Corporate development or the finance team builds it. CFO approves. Bankers use it in their pitch decks (with bias to sell the deal — your job is to take it apart). Board reads it to approve the offer. Press cites it when the deal is announced. PwC/EY/KPMG audits it in post-deal review.
When does it show up?
On every deal evaluated. In valuing your own company (financing, IPO, exit). In wills / family successions. In legal disputes or divorces where business value matters. In annual goodwill impairment review. In any conversation where someone says "this is worth $X" — the right question is "by what method and what assumptions."
What if we skip it?
You overpay for acquisitions. You accept low prices when you sell. You defend your own valuation with vague arguments. Any capital decision based on implied value is calibrated by intuition instead of method. In M&A this translates directly to future write-offs.
Three methods, three different questions
Each valuation method answers a different question about the same asset. Confusing the questions is the most common error of junior bankers.
DCF (Discounted Cash Flow) asks: how much are this business's future cash flows worth, discounted at cost of capital? It is the fundamental valuation — reflects the business the target generates. Inputs: FCF projection, WACC (Module 6.2), terminal rate.
Comparables asks: what multiple does the market pay TODAY for similar publicly listed companies? Reflects current market mood. Inputs: listed peers, median EV/EBITDA or P/E of the group. Useful because it calibrates against observable reality.
Precedents ask: what multiples have been paid in past M&A in this sector? Reflect control premiums — what a buyer typically pays ABOVE quoted price to take control. Inputs: sector deals from the last 3-5 years.
For Tostadora del Sur (same target as Module 5.1): $7M net income, $12M EBITDA, $60M revenue, growing 8%. The three methods give different ranges. The important thing is to understand why.
The visual below lets you play with each method's inputs. Watch how the ranges move and where they overlap. The overlap band is where there is a defensible case to negotiate.
Football field — the three methods
Four sliders, three value bands, one overlap zone. The point is NOT to pick ONE method; it is to understand why each gives what it gives.
If DCF lands very low: either your growth assumption is conservative or your WACC is high. If comparables land high: the market is in "expansion" mood for the sector. If precedents land very high: recent buyers paid premiums that historically did not work. Each divergence has a story the CFO must be able to tell.
Interactive visual
Three methods, three views — what is Tostadora del Sur worth?
Triangulate DCF, comparables, and precedents. The band where all three overlap is your defendable range.
DCF
Cash flows discounted at your WACC. The fundamental truth.
$386M–$522M
Comparables
Multiples of similar companies trading today.
$120M–$144M
Precedents
Multiples paid in past M&A transactions in the sector.
$147M–$183M
Revenue growth (DCF)
8.0%
WACC (DCF)
10.0%
EV/EBITDA multiple (Comps)
11.0x
Control premium vs Comps (Precedents)
25.0%
What you are seeing
Three methods, three answers. That is correct. If all three converge exactly, be suspicious — someone forced the inputs. The CFO's task is not to pick ONE method; it is to understand why each gives what it gives and triangulate. When the banker shows you "the target is worth $140M," the right question is: what is the range between methods? If DCF says $100M and precedents say $180M, "$140M" is mathematical average, not analysis. The real negotiation band is between methods, not at the arbitrary center.
Done well, triangulation ALWAYS produces a range, not a number. The "fair value" cited in commercial finance is mathematical fiction — the three methods almost never converge on a point. A mature CFO presents to the board: "it is worth between $X and $Y, we recommend offering $Z because the specific synergies justify going up from the floor."
Mental rule: when a banker shows you a single valuation number, ask for the range per method. If they don't have it ready, they didn't do the work — they are just showing the central case that best suits their commission.
The mechanics: how to build a defendable valuation
- Start with DCF. It is the only method that connects value to real cash flows. If your DCF is weak (optimistic projections, arbitrary WACC), everything else is decoration.
- Comparables: pick the right ones, not the convenient ones. Your peer list must defend similarity in scale, geography, business model, and growth profile. "Listed global company" is not a comp for a mid-market Chilean firm. Filter strict.
- Precedents: adjust for era and conditions. A 2021 deal at 18x EV/EBITDA during post-COVID frenzy is NOT comparable to a 2024 deal. Adjust for interest rate environment, credit conditions, sentiment.
- Triangulation = football field chart. Visualize the three ranges in one image. Where all three overlap = high-confidence band. Where only two overlap = negotiation band. Where only one operates = special case requiring defense.
- Document inputs visibly. WACC = X% (from Module 6.2), peers = list A, B, C (justification), precedents = deals X, Y, Z (years, adjustments). Without documentation, the valuation cannot be defended.
- Sensitize by scenario. What if projected growth drops 30%? If WACC rises 200 bps? If buyer synergies do not materialize? The real band considers scenarios, not just central point.
- DCF dominates when: the business has predictable cash flows, there are no direct listed peers, or you are valuing something unique (project, specific division, IP).
- Comparables dominate when: there are many actively listed peers, the sector is homogeneous (commodity, consumer staple), or you need to calibrate against the public market (IPO, exit).
- Precedents dominate when: you are doing control M&A and need to know what premium others have paid, or the sector has an active history of recent transactions.
- Practical rule for mid-market LATAM: use all three always, but weight DCF more if the target is non-listed or unique, comparables if it is in an active sector, and precedents if there are recent deals in the same country. No serious CFO enters a deal with a single method.
Adversarial check
Adversarial check
1.The banker presents: "DCF $80M, comps $110M, precedents $135M, we recommend offering $115M." What do you ask?
2.Your DCF gives $100M. Sector comparables trade at multiples implying $140M. What is the right reading?
3.When is it legitimate to use ONLY DCF and discard comparables and precedents?
Exit checklist
Suggested re-review: every time a real deal appears in the pipeline. Module 5.3 (integration) and 5.4 (real vs sold synergies) are the natural complement.
Optional
Go deeper
Sources and books to dig into the original material