Valuation modeling in Excel may refer to several different types of analysis, including discounted cash flow (DCF) analysis, comparable trading multiples, precedent transactions, and ratios such as vertical and horizontal analysis. The various types of analyses may be built from scratch in Excel or may use an existing template/model. This type of work is commonly performed by a wide range of finance professionals.
Why perform valuation modeling in Excel?
There are many reasons to perform valuation modeling in Excel, and professionals across a wide range of industries spend a significant amount of time doing exactly this kind of work. The reasons include:
Preparing to raise capital from investors (i.e., determining what price shares should be issued at)
Selling a business and identifying what range of prices to accept
As noted above, there are three primary methods for valuing a company. Discounted cash flow, or DCF, analysis is the most detailed method, and often the most relied upon approach. Below is a description of how to perform each type of modeling.
#1 Discounted cash flow modeling in Excel
Using the DCF approach, a finance professional takes 3-5 years of historical financial information about a business and puts it into an Excel model. Next, they link the three financial statements together so that they are dynamically connected.
Following that, assumptions are made about how the business will perform in the future, and those assumptions are used in Excel formulas to create a forecast for the future (typically, about five years into the future). Finally, they calculate a terminal value for the business and discount the forecast period and the terminal value back to the present, using the company’s weighted average cost of capital(WACC).
The comparable multiples valuation modeling approach in Excel is very different from that of a DCF model. With this method, instead of determining a company’s intrinsic value (as above), an analyst will look at the valuation multiples of other publicly traded companies and compare them to that of the business(es) they wish to value. Common examples of valuation multiples include EV/Revenue, EV/EBITDA, EV/EBIT, Price/Earnings, and Price/Book.
With this third approach to valuation modeling in Excel, an analyst will look at the prices paid for mergers and acquisitions (M&A) of similar businesses that took place in the past. This is also a relative form of valuation, but unlike comparable trading multiples, these transactions include takeover premiums (the value of control) and are based in the past (which can quickly become out of date).
The flexibility of Excel is both a blessing and a curse. While larger organizations may attempt to use software to manage their financial modeling, the reality is they often end up reverting back to Excel.
The main reasons Excel is used include:
Total flexibility and customization
Extremely low cost to purchase
Easy to share externally with other parties
Ubiquitous and understood by all
Simple to use and easy to audit (no “black box”)
On the flip side, however, the extreme flexibility of Excel means that models may be prone to errors, inaccurate calculations, and poor practices. Analysts and other finance professionals must ensure that they possess strong Excel modeling skills and a thorough understanding of industry-leading best practices.
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