First Chicago Method
What is the First Chicago Method?
It's a business valuation approach used by venture capital and private equity investors that combines aspects of both a multiples-based valuation and a discounted cash flow valuation approach. The method was first developed by First Chicago Corporation Venture Capital, and is named after it.
Where have you heard about the First Chicago Method?
It's quite a technical term, so you probably won't have heard about it in the general business press, but you may well have if you're a private equity investor or you're running a start-up company that's growing fast.
What you need to know about the First Chicago Method.
The method estimates payouts during the holding period under three scenarios: best case, base case and worst case. It's particularly useful in the valuation of growth companies which often don't have historical financial results that can provide comparable company analysis.
The First Chicago Method is often preferable to a Discounted Cash Flow taken alone, because such income-based business value assessment can lack the support generally observable in the marketplace.
Variations of the First Chicago Method are used in a number of markets, including the private equity secondary market where investors predict outcomes for portfolios of private equity investments under various scenarios.