The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Reasons for Popularity and Potential Pitfalls

Why is the use of relative valuation so widespread? Why do managers and analysts relate so much better to a value based on a multiple and comparables than to discounted cash flow valuation? This section considers some of the reasons for the popularity of multiples.

• It is less time- and resource-intensive than discounted cash flow valuation: Discounted cash flow valuations require substantially more information than relative valuation. For analysts who are faced with time constraints and limited access to information, relative valuation offers a less time-intensive alternative.

• It is easier to sell: In many cases, analysts in particular and salespeople in general use valuations to sell stocks to investors ...