World Library  
Flag as Inappropriate
Email this Article

First Chicago Method

Article Id: WHEBN0019302564
Reproduction Date:

Title: First Chicago Method  
Author: World Heritage Encyclopedia
Language: English
Subject: Cash flow, Valuation (finance), Venture capital, Corporate finance
Collection:
Publisher: World Heritage Encyclopedia
Publication
Date:
 

First Chicago Method

The First Chicago Method or Venture Capital Method is a context specific business valuation approach used by venture capital and private equity investors that combines elements of both a multiples-based valuation and a discounted cash flow (DCF) valuation approach.[1]

The First Chicago Method was first developed and consequently named for First Chicago Corporation Venture Capital, the predecessor of private equity firms Madison Dearborn Partners and GTCR.[2]

Method

The First Chicago Method takes account of payouts to the holder of specific investments in a company through the holding period under various scenarios; see Quantifying uncertainty under Corporate finance. Most often this methodology will involve the construction of:

  • An "upside case" or "best-case scenario" (often, the business plan submitted)
  • A "base case"
  • A "downside" or "worst-case scenario."

Once these have been constructed, the valuation proceeds as follows.[3]

Use

The method is used particularly in the valuation of growth companies which often do not have historical financial results that can be used for meaningful comparable company analysis. Multiplying actual financial results against a comparable valuation multiple often yields a value for the company that is objectively too low given the prospects for the business.

Often the First Chicago Method may be preferable to a Discounted Cash Flow taken alone. This is because such income-based business value assessment may lack the support generally observable in the market place. Indeed, professionally performed business appraisals go further and use a set of methods under all three approaches to business valuation.[4]

Variations of the First Chicago Method are employed in a number of markets, including the private equity secondary market where investors project outcomes for portfolios of private equity investments under various scenarios.

External links and references

Notes

  1. ^ Kauffman Foundation article on The First Chicago Method. Kauffman Foundation.
  2. ^ "How to value your deal like an investor?". Global Entrepreneurship Institute. December 2007.
  3. ^ See, for example, Schumann (2006).
  4. ^ Business valuation using the Market, Income and Asset Approaches. ValuAdder

Links

  • Ann-Kristin Achleitner and Eva Lutz. (2008). First Chicago Method: Alternative Approach to Valuing Innovative Start-Ups in the Context of Venture Capital, Social Science Research Network Accepted Paper Series.
  • James L. Plummer. (1997). A Primer on Venture Capital Financial Calculations, 23rd Annual Venture Capital Institute.
  • C.P. Schumann (2006). Improving Certainty in Valuations using the Discounted Cash Flow Method, Valuation Strategies Magazine, September/October 2006.
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
 
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
 
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.
 



Copyright © World Library Foundation. All rights reserved. eBooks from Hawaii eBook Library are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.