How To Value Private Company

What is Private Company Valuation?

Private company valuation is a collection of procedures that are used to determine the current net worth of a company. For publicly traded companies, this is relatively simple: we can simply retrieve the stock price and the number of shares outstanding from databases such as Google Finance, which contain information about the company. The value of a publicly traded company, also known as its market capitalization, is the product of the two values mentioned above.

Private companies, on the other hand, will be unable to benefit from such an approach because the information regarding their stock value is not publicly available. Because privately held companies are not required to follow the strict accounting and reporting standards that apply to publicly traded companies, their financial statements may be inconsistent and unstandardized, making them more difficult to understand and understandably more difficult to interpret.

In this section, we will discuss three commonly used methods for valuing private companies that make use of publicly available data.


What Are The Private Valuation Metrics

In addition, equity valuation metrics such as price-to-earnings ratios, price-to-sales ratios, price-to-book ratios, and price-to-free cash flow ratios must be gathered. The EBITDA multiple can assist in determining the enterprise value (EV) of a target company, which is why it is also referred to as the enterprise value multiple. This provides a much more accurate valuation because it takes debt into account when calculating the value of the asset.

It is calculated by dividing the enterprise value by the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the company (EBITDA). The enterprise value of a company is the sum of its market capitalization, the value of its debt (minority interest, preferred shares), and the amount of cash and cash equivalents it has on hand.

If the target company operates in an industry where recent acquisitions, corporate mergers, or initial public offerings (IPOs) have occurred, we can use the financial information from those transactions to calculate a valuation for the company. In the absence of a valuation estimate for the target's closest competitors, we can use the findings of investment bankers and corporate finance teams to conduct an analysis of companies with comparable market share in order to arrive at an estimate for the target's firm's valuation.

The comparable company analysis does not compare any two companies exactly, but by consolidating and averaging the data from the comparable company analysis, we can get a sense of how the target firm compares to its publicly traded peer group. From there, we'll be in a better position to determine the value of the target company.


Methods for Valuing Private Companies


Comparable Company Analysis

The Comparable Company Analysis (CCA) method operates under the assumption that similar firms in the same industry have similar multiples. It's hard to get information about a private company if it doesn't have to be public. We look for companies that are similar to our target valuation, and we use their multiples to figure out how much the target company is worth. This is the most common way to value a private company.

To use this method, we first figure out what the target company is like in terms of size, industry, operations, and so on. Then we set up a "peer group" of companies that have the same characteristics. Then, we take the multiples of these businesses and figure out the average for the industry. We show how to value a company using the EBITDA multiple, which is one of the most common multiples. The choice of multiples can vary depending on the industry and growth stage of the company.

Net income after taxes, interest, depreciation, and amortisation can be called EBITDA. It can be used to figure out a company's free cash flow, which is how much money the company has to spend. The formula for valuing a company is as follows:

Multiple (M) x EBITDA of the target firm is the value of the target firm.

Where, the Multiple (M) is the average of Enterprise Value/EBITDA of similar businesses, and the EBITDA of the target company is usually estimated for the next 12 months.


Estimating Discounted Cash Flow

If you are using the discounted cash flow method to value a private company, the discounted cash flow of similar companies in the peer group is calculated and then applied to the target company's value. It is necessary to estimate revenue growth for a target company by taking the average of revenue growth rates for similar companies in the peer group as a starting point.

Because of the stage in which the company is in its lifecycle and the accounting methods used by the management, this can be a difficult task for private companies. Because private companies are not subject to the same stringent accounting standards as public companies, their accounting statements frequently differ significantly from those of public companies and may include some personal expenses in addition to business expenses—a practise that is common in smaller family-owned businesses—as well as owner salaries, which will include the payment of dividends to ownership, among other things.

Having estimated revenue, we can forecast changes in operating costs, taxes, and working capital, all of which can be used to forecast future revenue. After that, the free cash flow can be calculated. After capital expenditures have been deducted, this account provides the operating cash that is left over. In most cases, investors use free cash flow to determine how much money is available to be returned to shareholders in the form of dividends, among other forms of distribution.