Valuation Modeling in Excel

What is Valuation Modeling in Excel?

Valuation modeling in Excel may refer to several different types of analysis, including discounted cash flow (DCF)DCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. The model is simply a forecast of a company’s unlevered free cash flow analysis, comparable trading multiples, precedent transactionsPrecedent Transaction AnalysisPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today., 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 capitalIPO ProcessThe IPO Process is where a private company issues new and/or existing securities to the public for the first time. The 5 steps discussed in detail from investors (i.e., determining what price shares should be issued at)
• Selling a business and identifying what range of prices to accept
• Acquiring a companyMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we'll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs and knowing how much to pay for it
• For issuing shares to employees (an Employee Share Ownership Plan or ESOP)
• Internal budgeting and planning purposes
• Succession planningSuccession PlanningSuccession planning refers to the process in which employees are recruited and developed with the aim of filling a key role within an organization. It for the business
• Evaluate investment opportunities and capital projects
• Impairment testing (related to any significant reduction in asset values)
• Legal proceedings, including insolvencyInsolvencyInsolvency refers to the situation in which a firm or individual is unable to meet financial obligations to creditors as debts become due. Insolvency is a state of financial distress, whereas bankruptcy is a legal proceeding.

How to perform valuation modeling in Excel?

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 statementsHow the 3 Financial Statements are LinkedHow are the 3 financial statements linked together? We explain how to link the 3 financial statements together for financial modeling and 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 valueTerminal Value​Terminal Value (TV) is the estimated present value of a business beyond the explicit forecast period. TV is used in various financial tools for the business and discount the forecast period and the terminal value back to the present, using the company’s weighted average cost of capitalWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt.(WACC).

For a more detailed explanation, read this step-by-step guide to DCF modelingDCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. The model is simply a forecast of a company’s unlevered free cash flow.

#2 Comparable trading multiples in Excel

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/EBITDAEV/EBITDAEV/EBITDA is used in valuation to compare the value of similar businesses by evaluating their Enterprise Value (EV) to EBITDA multiple relative to an average. In this guide, we will break down the EV/EBTIDA multiple into its various components, and walk you through how to calculate it step by step, EV/EBIT, Price/EarningsPrice Earnings RatioThe Price Earnings Ratio (P/E Ratio is the relationship between a company’s stock price and earnings per share. It provides a better sense of the value of a company., and Price/BookValuationFree valuation guides to learn the most important concepts at your own pace. These articles will teach you business valuation best practices and how to value a company using comparable company analysis, discounted cash flow (DCF) modeling, and precedent transactions, as used in investment banking, equity research,.

For a more detailed explanation, read this guide to comparable company analysisComparable Company AnalysisThis guide shows you step-by-step how to build comparable company analysis ("Comps") and includes a free template and many examples..

#3 Precedent transaction modeling in Excel

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).

For a more detailed explanation, read this guide to precedent transactionsPrecedent Transaction AnalysisPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today..

Skills for performing valuation modeling in Excel

To perform these types of analyses, financial professionals are required to have many different skills that can often take years of education and experience to master.

The most important skills include:

• Accounting (principles, methods, financial statements)
• Finance (financial math, formulas, ratios, calculations)
• Excel (MS Excel best practices, shortcuts, functions)
• Strategy (competitive advantage, market analysis)
• Valuation (a combination of all of the preceding skills)

CFI’s Financial Analyst CertificationBecome a Certified Financial Modeling & Valuation Analyst (FMVA)® covers all of these in one intensive online program, while other designations may not cover all skill areas.

Jobs that perform valuation modeling in Excel

There are many jobs and career paths that require the skills of being able to value a company, a business unit, or an investment opportunity in Excel.

Some of the most common careers that require such skills include the following:

• Investment bankingIBD - Investment Banking DivisionIBD is an acronym for the Investment Banking Division within the overall investment bank.  IBD has responsibility for working with corporations, institutions, and governments to carry out capital raising (underwriting in equity, debt, and hybrid markets) as well as for executing mergers and acquisitions (analyst and associate level)
• Private equity & venture capital (analyst and associate level)
• Corporate development (analyst and manager level)
• Financial planning & analysisFP&AFinancial Planning and Analysis (FP&A) is an important function at a corporation. FP&A professionals support executive decision making for (analyst, manager, and director level)
• Public accounting (transaction advisory, impairment testing)
• Equity researchEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in.  The Equity Research Division is a group of analysts and associates. This equity research overview guide (associate and analyst level)

Why use Excel for valuation modeling?

The flexibility of Excel is both a blessing and a curse. While larger organizations may attempt to use software to manage their financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model., 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.

Additional resources

Thank you for reading this guide and overview of valuation modeling in Excel. Hopefully, by now, you have a solid understanding of what it is, why it’s used, how it’s performed, and the skills required to carry it out.

To learn more about modeling, check out Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)® and the additional free CFI resources below:

• Valuation MethodsValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions
• Analysis of Financial StatementsAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement,
• Data Sources in Financial ModelingData Sources in Financial ModelingCollecting and using the right data sources in financial modeling is critical to the success of a business. Financial modeling requires gathering and
• Excel Modeling Best PracticesExcel Modeling Best PracticesThe following excel modeling best practices allow the user to provide the cleanest and most user-friendly modeling experience. Microsoft Excel is an extremely robust tool. Learning to become an Excel power user is almost mandatory for those in the fields of investment banking, corporate finance, and private equity.