Valuation and Purchase-Price Mechanics

Valuation estimates what an asset is worth under specified assumptions. Price is what a particular buyer and seller agree. The two meet in a transaction, but they are not interchangeable. A company can trade at a market price that exceeds an investor's defensible valuation.

Several methods provide different perspectives. Trading comparables show how public markets value related companies. Transaction comparables describe prices paid for control under particular circumstances. A discounted cash-flow analysis relates value to future cash generation and a discount rate. An LBO analysis asks what a financial buyer can pay while meeting its return requirements with a feasible capital structure.