There are four proven methods of valuing companies: Discounted Cash Flow (DCF), Transaction Comparable, Trading Comparable and Leverage Buy-out (LBO).
Many raise the question whether these valuation methods hold true during recession.
The answer is still "yes". But, these are affected due to the market conditions in the following 3 ways.
1. Discounting rate for DCF is reduced due to risk free rate. Simultaneously, the Free Cash Flow (FCF) is reduced due to abysmal sales. The overall valuation is less than what it used to be in pre-recession days.
2. In case of Transaction and Trading comparable, the multiple has been lowered.
3. In case of LBO, high yield bond sell is difficult in this market. LBO deals have rarely taken place since last Fall. Essentially, LBO deals are out of favor now.
Strategic buyers are still making purchases at a time of low valuation to fill a gap in their product, service or geography. Financial buyers are waiting in the sidelines for the market to improve.
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