First Chicago method

The First Chicago method is a valuation technique that explicitly acknowledges uncertainty by building several future scenarios rather than a single trajectory. It generally distinguishes three cases, a downside scenario, a central scenario and an upside scenario, values each of them, then weights the results by their probability of occurrence to obtain an average value.

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Each scenario can be valued by a Discounted cash flow (DCF) method or an exit multiple, depending on the company's maturity. This approach is particularly suited to young companies and projects with a binary outcome, for which a linear forecast would be misleading: it echoes the logic of the Venture capital while offering a more nuanced reading of risk, since it captures the possibility of failure as much as of clear success.

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By way of illustration, a project is valued at 2 MCHF in a downside case weighted 30%, 8 MCHF in a central case at 50% and 20 MCHF in an upside case at 20%. The weighted average comes to 0.6 plus 4 plus 4, that is 8.6 MCHF, a value that explicitly embeds the probability of failure as well as of success.

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Its robustness depends entirely on the quality of the scenarios and probabilities used, which must be argued rather than arbitrary. Applied in an business valuation, the First Chicago method has the merit of making the reasoning transparent and of providing, beyond a central value, a range that lights up the sensitivity of the valuation to development assumptions.