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Best Way To Value an IPO?

craig kensek's Profile

IPO valuation methodsWhat do you feel is the most valid way to value an IPO?

What do you feel is the most dubious, though the market may love it?


(Director of Global Accounting) |

Best: Discounted (for risk/time) forward Ebidta vs. industry comps. Basically, assume that Ebidta will trend toward industry norms, and that growth will trend in that direction as well. You want to discount it looking forward, as there is a risk that the growth won't materialize, etc.

Worst: Price/Revenue * Growth, rearward looking. It's real data, but if you're smart you IPO at your growth peak, before you plateau. There are a few cases where that proved to be a good bet...but it feels to me more like a bet than discounting for the risk that the growth won't materialize, or the company won't become profitable, etc.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Craig, check out this free resource here at Proformative.

Allen Girnus
Title: Controller, Business Support
Company: Psion Corporation
(Controller, Business Support, Psion Corporation) |

Choosing the discount rate is an important consideration using the "Best" scenario. I calculate the WACC for the firm in question and use it to discount the future revenue stream to establish firm value.

In the calculation of WACC, a consideration is whether to use the current 10 year T-Note rate as the basis of "no risk' return in the Cost of Equity Calculation (CAPM). The historically low 10 year rate will drive the valuation higher than a scenario where inflation returns in the near term. This is something to keep in mind if you plan to discount for risk/time. Finally, I estimate equity beta using an industry average of public firms in the IPO's market space.

Topic Expert
Brenda Morris
Title: Board of Directors, Audit Committee Chai..
Company: Boot Barn
(Board of Directors, Audit Committee Chair, Boot Barn) |

I am sure you know this Craig, but, if you are close to an investment banker they can provide some great, confidential insights into the value of your business in an IPO scenario. They have their fingers on the pulse for specific industries, market acceptance to difference methodologies for valuation and how a company would/is perceived in the public markets.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

The best way to value an IPO? There are so many ways to do it. But in my experience - keep it simple. Realize what you are doing is taking management's assumptions and throwing your own assumptions, on top of them. Finance people love to discount cash flows. This approach is valid when you are looking at 20 years of projections and you are in a high cost or stable rate money period. With an IPO you are probably looking at three years of projections at max. Discounting should not add much to this equation, only needless complexity. Today's discount rate is be very low.

The best way - take year three earnings and divide by shares outstanding (EPS) and apply the industry or sector standard price earnings multiple to gross up the value.

The worst way - Throw on a bunch of acronym's and use a Cray super computer.


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