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?
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
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.
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
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