was successfully added to your cart.

What is it?

Business Valuation is a special type of Guesstimate question where the target variable is the value of a company or a business line. An example of a real McKinsey Business Valuation question:How much is Singapore Airlines worth today?

Strategy

Generally, you will still follow the same 4-step approach of Guesstimate questions: (1) Clarify, (2) Breakdown, (3) Solve, and (4) Consolidate. However with Business Valuation questions, step (2) and step (4) require a little more technical concepts.We will be showing you two of the most popular Business Valuation methods. Case Interviews will not ask you about more complicated financial techniques.

1. Finance 101 – Discounted Case Flow method

The rationale behind this method is this: how much money do you need to have in the bank now to generate that much annual Cash Inflow (Income).

  • General method: Find out the cash flow and discount it to the present.
  • Detailed Calculation: Value of a Business = Expected Annual Cash Flow / Annual Interest Rate
  • Illustration
Question: How much is Singapore Airlines worth today?Candidate:To find out the value of Singapore Airlines, I need to know its (1) annual cash flow (or net profit) and (2) the market interest rate.(1) Let’s estimate the annual net profit of Singapore Airlines…… So according to this estimation, Singapore Airline’s net profit is $200 million(2) Assume that the market interest rate is 10%, it that a fair assumption? …With the annual net profit of $200 million and the market interest rate of 10%, Singapore Airlines is worth approximately $200 million / 10% = $2 billion

2. Finance 102 – Industry Multiple method

Why is Discounted Cash Flow not perfect?Think about this Business Valuation question. Why are the values for NBA teams are so high even though most of them neither make money nor are expected to make money?The answer is that people own teams for reasons other than just money. The Discounted Cash Flow only takes money into consideration.

  • The Industry Multiple concept

Value of a Business = Base Value x Industry Multiples. The Base Value is often a standardized value that best predicts a company’s value in each particular industry. This can be Revenue, Net Profit, Number of Registered Users, etc. Choosing the best Base Value depends on each industry.The Industry Multiple is the relative ratio of how many times of the Base Value the company’s value is. The value of the Industry Multiple also depends on each industry.

  • Illustration
Suppose in the airline industry, Revenue is the best Base Value. Data on three peer companies with Singapore Airlines is as follow:Average Annual Revenue (million dollars) Realized Value based on real Acquisition deals (million dollars) for Singapore Airlines of $200 is? Northwest Airlines of $150 is $100. Trans Airways of $50 is $30. Cambodia Airlines of $10 is $7.5. The best estimate of the airline Industry Multiple is ( 100 + 30 + 7.5 ) / ( 150 + 50 + 10 ) = 0.65Therefore the best estimate of Singapore Airlines Value is $200 x 0.65 = $130 (million)
Business Valuation Practice

Estimate the Value of the following.1. Southwest Airlines 2. Walmart 3. Harvard University 4. Manchester City Soccer Team 5. Apple 6. This website: www.mckprep.com 7. Tax Division of Deloitte in the New York City office 8. Marriott 9. University of Alabama Football team 10. Statue of Liberty… Answer key is coming

* * *

If you’re ready to go deeper, our website has plenty of resources for you to explore, and you can also subscribe to our YouTube channel or our emailing list!


 

Best,

mckprep.com

[/vc_column]
  • Jason Chaw

    Please creating a video tutorial on some prominent business valuation questions. That would be extremely helpful!

    • vipul jhamnani

      Yes please!