Valuing a public company is as straightforward as checking the stock price and the number of outstanding shares. But, how do you value a private company? Since privately held companies are not bound by the same strict accounting and reporting requirements as publicly traded companies, financial statements can be inconsistent and difficult to interpret. But, if a private company desires to take on investors, those investors need a way to estimate the company’s value — leading back to the crucial question, “How do you value a private company?”
Here are two common valuation methods of private companies using data available to the public:
Comparable Company Analysis (CCA)
The Comparable Company Analysis (CCA) method of valuing a private company involves identifying publicly traded companies that closely resemble the private company in question. The assumption is that similar firms in the same industry have similar multiples. Therefore, when financial details are not available on a private company, we can:
- identify a peer group of public companies (in the same industry, ideally direct competitors of similar size and growth rate),
- collect the multiples of the peer companies (such as EBITDA or revenue multiples),
- calculate an industry average,
Discounted Cash Flow (DCF)
The Discounted Cash Flow (DCF) method requires significant financial modeling experience and essentially expounds on the CCA method. In this method, the private company’s discounted cash flow is estimated based on public financials available about the companies in the peer group by
- calculating average growth rate of peer group to determine applicable revenue growth rate for the private firm,
- making projections of the private firm’s operating expenses, taxes, revenue, etc.,
- calculating free cash flow (FCF) to determine an estimate for amount of operating cash flow after capital expenditures have been deducted.
Bottom line: the answer to “How do you value a private company?” involves a lot of assumptions, averages, and estimates. This makes the task much less an exact science, and much more a nuanced craft that is honed with experience. With our years of experience valuing private companies, it is wise to involve professional business advisors like Viking Mergers & Acquisitions when dealing with business valuations of any kind. Contact us today to learn more.
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