Between a DCF valuation and an LBO valuation, which is generally lower, assuming all else is equal?

The statement that an LBO (Leveraged Buyout) valuation is generally lower than a DCF (Discounted Cash Flow) valuation is rooted in the methodologies used in each valuation approach.

In a DCF valuation, the analyst typically forecasts the free cash flows of the business and discounts them back to their present value using the company's weighted average cost of capital (WACC). This valuation method captures the intrinsic value of the entire firm based on its operating performance and assumes a more optimistic growth trajectory and a longer-term outlook.

On the other hand, an LBO valuation focuses on the cash flows available to service debt after the acquisition has taken place. In an LBO, a significant portion of the purchase price is funded through debt, and the valuation tends to reflect the minimum amount that a financial sponsor would pay to achieve an acceptable return on the investment, factoring in the leverage used. This can include the expectation of debt paydown, exit multiples, and the overall returns required by equity investors in a leveraged buyout scenario.

Thus, because an LBO valuation prioritizes the financial structure of the deal with a focus on manageable cash flows for debt repayment, it often comes out lower than a DCF valuation, which is more comprehensive and forward-looking. The