Few skills are more important to analysts, investment bankers, and corporate strategists than the ability to value a business or asset. This is where modeling for equity valuation in Excel comes in. Excel remains widely used to construct valuation appraisals due to its flexibility, transparency, and ubiquity.
This in-depth tutorial will cover what valuation modeling in Excel is, how it interacts with other financial models, key concepts of business valuation, and more, and it will include both a full step-by-step written guide and video tutorials on how to create a DCF model in Excel.
What Is Valuation Modeling in Excel?
Valuation Modeling in Excel refers to the technique of building spreadsheets to estimate the value of a company or a project. Consisting of historical financial information, projections, assumptions, and different valuation methodologies, these models are constructed as part of the process.
Valuation models are a tool that can assist investors, company executives, and analysts in making a well-educated approximation to the value of mergers and acquisitions, fundraising, as well as internal planning.
Valuation Modeling vs. Financial Modeling
Financial modelling is a related but broader activity; it’s simply the use of dynamic spreadsheets to project how a company will perform in future periods. This is typically composed of projected income statements, balance sheets, cash flows, ratios, and such, and also handling scenario analysis. Now these applications run at scale to support strategic planning (budgeting, fundraising, M&A planning, internal performance tracking, etc.).
Valuation modeling, however, is a subset of financial modeling. At its heart, their primary function is to value a company or a given piece of an asset using techniques such as DCF (Discounted Cash Flows), Comparable Company Analysis, or Precedent Transactions, among others. Every valuation model is indeed a financial model, but not every financial model is a valuation model.
For example, the budgeting model might not be the one that calculates the company value. But a DCF model in Excel for valuation of a start-up or before an IPO is not only a financial model, it’s a valuation model.
Why is Excel used for Valuation Modeling?
Even with its advanced peers, Excel is still the gold standard for valuation modeling. Why?
- Customisation: Quickly customise the model with direct industry metrics or specific business operations.
- Transparency: Everything is visible and editable formulas, assumptions, and logic.
- Universal: Just about every finance professional learns Excel.
- Affordable: Forget pricey software subscriptions.
Excel includes built-in formulas and functions and is also equipped with tools that facilitate creating pivot tables and charts, allowing you to analyse financial data, even if you have limited experience in this area. Excel also provides logical operators for those interested in financial analysis, and is perfect for people working in investment banking, equity research, and corporate finance.
Primary Modes of Valuations Done in Excel
Discounted Cash Flow (DCF) Model
A DCF model Excel is one of the most common LBO valuation types. It calculates the worth of a company by comparing the present value of expected future cash flows, discounted by the weighted average cost of capital (WACC).
Steps in a DCF model include:
- Forecasting Free Cash Flows (commonly for 5-10 years).
- Calculating terminal value.
- Determinant of good discount rate (WACC).
- Discounting the forecasted cash flows and terminal value to the present.
- Adding these for enterprise value or equity value.
- Comparable Company Analysis (Comps).
This is the method of comparing the target to comparable public companies. They are compared using the main financial multiples such as EV/EBITDA, Price to Earnings (P/E), EV/Revenue, and Price to Book (P/B) ratio. You can also come up with an estimate of a target’s relative market valuation by multiplying or dividing its financials by the average (or median) of these multiples.
Phases covered:
- Identify comparable firms.
- Gather their financial data.
- Calculate multiples.
This is a usage of the median or average multiples on the comparable metrics from the target company
Precedent Transactions Analysis
This approach, which is most commonly applied in M&A, values a business based on previous transactions for similar companies.
Steps included:
- Identify past transactions.
- Extract transaction multiples.
- Multiply by applicable multiples to the target.
- Asset-Based Valuation.
This method works out the value from the assets and liabilities of the company. It’s better suited for asset-heavy or troubled companies.
Sequences are:
- Value all the tangible and intangible assets
- Subtract liabilities
- Derive net asset value
- Using an Excel Valuation Template
An Excel Valuation Template
An Excel Valuation Template will save your time and will make sure your valuation is structured. You can also be sure that the valuation will be accurate and designed for efficiency. The goal of these templates is to facilitate modeling and minimise manual errors and inconsistencies. They typically include:
- Assumptions and historical financial data input sheets (such as revenue growth rates, margins, and capital structure)
- Forecasting fields to calculate revenues, operating costs, working capital, and free cash flow.
- Specialised sheets to calculate the big numbers, including WACC and terminal value
- Outputs from the Valuation, including enterprise and equity value and share price estimates
- Summary dashboards and charts to easily display KPIs or valuation results for presentations or reports
How to Create a Basic Valuation Model in Excel: Step by Step
Now let’s go through how to construct a simple DCF model Excel:
1. Collect Historic Financial Information
Gather the income statement, the balance sheet, and the cash flow statement of the last 3-5 years.
2. Make Assumptions and Predict Future Cash Flows
Estimate your revenue, cost, tax, and capital spending for the next five to 10 years.
3. Free Cash Flow Estimate
Use formula: FCF = EBIT (1 – Tax Rate) + Depreciation & Amortisation – CapEx – Change in Working Capital
4. Determine WACC
Compute the weighted average cost of capital using the firm’s cost of equity and debt.
5. Estimate Terminal Value
Use of either the perpetuity growth method or the exit multiple method.
6. Discount the Cash Flows to arrive at a Present Value difficulty really applying this technique.
Use WACC for discounting all free cash flow and terminal value.
7. Compute Enterprise value and Equity value
Subtract debt and add cash for the equity value. For the share price, divided by the number of shares still in the market.
Excel’s Best Practices for Valuation Modeling
Separate Inputs, Calculations, and Outputs
Keep the resources, logic, and output on different sheets or sections. This makes your model easier to explore, audit, and modify.
Use Consistent Formatting
Use different colours (e.g., blues for inputs and blacks for formulas) to make the explanation clear. It allows users to have immediate feedback on what they can edit/review.
Give names and clear labels to ranges
Use named ranges for important variables to improve the readability of formulas. Make sure to always clearly title rows and columns for easy reading.
Minimise Hardcoding
Never manually enter a numeric value in a formula. Cross-reference figures in the assumptions section so they can be easily updated and cross-checked for consistency.
Include Sensitivity Analysis
Include spreadsheet tools or scenario tables that illustrate how key changes impact valuation. This creates flexibility and legitimacy in your model.
Avoid Circular References
Design your model to avoid loops unless they are necessary. In Excel, circular references can produce errors or incorrect results.
Test and Audit Your Model
Leverage formula tracing and error-checking tools for Excel. Run periodic checks on calculations to verify their basis and accuracy.
Use Clear Versioning and Documentation
Number your files and keep a record of your changes. Add a “Notes” sheet to record major assumptions and sources.
Common Challenges in Valuation Modeling.
- Excessive trust in speculation and flimsy reasoning.
- Incorrect discount rate calculations.
- Not having taken into consideration non-operating assets or liabilities.
- Ignoring macroeconomic factors in forecasting.
- The risk is less risky, in fact, if you are continuously updating your model with new data and knowledge of your market.
Real-World Applications of Valuation Modeling.
- Valuation models are used in:
- IPO capital raising and M&A advisory by an investment bank.
- Private equity to price-targeted buyouts.
- Firm financing for internal planning and budgeting.
- Brokers to provide buy/sell/hold recommendations for equity research.
Conclusion
If you work in finance, you should know how to model a company’s performance. Whether you are looking for a DCF model in Excel for a specific company or you are looking to use a DCF model Excel as a template to plug in your numbers, these models will give you the framework you need to start making effective investment decisions based on the present value of cash today. You can evaluate companies and make better financial decisions by knowing these techniques and creating disciplined, transparent models.
With companies becoming increasingly complex in terms of operations and with greater reliance on data, the demand for accurate and flexible valuation modeling will only increase. If you’re a student or a businessman and need to learn how to value a company quickly in a world that moves around the clock, you’ve come to the right place.
FAQ about Valuation Modeling in Excel
What is Excel-based valuation modelling?
Excel valuation is modelling an investment in which a financial model is built in an Excel spreadsheet to value a company, business, or investment. Usually, you project the future cash flows, use valuation methods like DCF (Discounted Cash Flow), and industry multiples in order to estimate a value.
How is valuation modeling different from financial modeling?
Overall, financial modeling encompasses a variety of forecasting and decision analysis tools (including other things like budgets, profitability analysis, and performance monitoring), whereas valuation modeling is uniquely focused on trying to figure out what a business is worth, both in terms of its market value and its intrinsic value. Fundamental valuation can be one of the outputs of a full-featured financial model.
What is a DCF model in Excel, and why is it used?
A DCF model Excel is a spreadsheet inspired by the Modern Graham valuation model that is also able to calculate the intrinsic value of our stocks. It then raises these cash flows to the power of the remaining years (before the company projects the company is liquidated or the project ends) and discounts them using a discount rate (usually the company’s WACC). This method is common in investment banking, private equity, and corporate development, and provides a snapshot of value based on projected rev and profit and loss (P&L).
Does anyone have an Excel valuation model template?
Yes, a lot of folks will use or modify an Excel valuation template to save time and also ensure relative consistency. These templates also frequently provide pre-formatted sections for your revenue forecasts, cost assumptions, balance sheet items, and DCF calculations.
Who does Excel-based modeling for valuation?
Investment bankers, equity research analysts, private equity professionals, and CFAs (among others) use our products to model out their deals or investment opportunities in Excel, making the programs an excellent addition to any resume, as well as a good introduction to financial modeling skills that are widely used in the industry.
Is valuation modeling in Excel something that beginners can learn?
Absolutely. From simple financial modeling to a full-blown valuation model, beginners should be able to get there by following our structured templates and applying our DCF tools with just simple Excel skills and finance knowledge.
