Dennis Hansmann No Comments

Valuing a private company is often a crucial step for various reasons—be it for potential mergers and acquisitions, estate planning, or understanding the implications of tax changes. This article will unpack the essential methods and considerations for valuing a private company based on three core approaches and important factors that may lead to valuation discounts.

Importance of Timing and Information Quality

Valuing a private company isn’t an overnight task. On average, third-party evaluations can take around four weeks and may involve in-depth financial and organizational analysis, management interviews, and even on-site visits. Quality matters; the better the information at hand, the more expedited the valuation process can be.

Section 1: Core Approaches to Business Valuation

Income Approach

When it comes to the Income Approach, the emphasis is on the business’s predicted future cash flow. This is the money that is projected to be accessible to the company’s debt and equity investors. Future revenue growth, operating profitability, and capital expenditure requirements are all considered. The idea of terminal value also seeks to identify the business’s expected worth after a projection period.

But remember that $100 predicted next year is not worth $100 now. This decrease in value over time is dealt with by ‘discounting’ future cash flows to their present value. For this, a discount rate is utilized, which considers both the temporal worth of money and the unique risks associated with the firm.

Market Approach

The Market Approach entails examining similar firms with publicly available prices or recent transaction data. After identifying comparable companies, ‘multiples’ of value, such as earnings or assets, are determined for each. These multiples are then modified to account for any changes in the subject company’s growth potential or risk levels compared to the comparables. Let’s dive deeper into the steps of this approach –

  • Identify Comparable Companies: The first step is to identify companies that are similar to the one being valued. Similarity is typically determined based on factors like industry, market focus, size, and growth rates. The more comparable the companies, the more accurate the valuation will be.
  • Gather Financial Data: Once you’ve identified comparable companies, the next step is to gather relevant financial data. This could include earnings, revenue, cash flow, and asset values. Publicly traded companies usually disclose this information in their quarterly and annual reports, while transaction data for private companies may be available through industry reports or databases.
  • Calculate Valuation Multiples: For each comparable company, calculate valuation multiples based on the financial data gathered. Common multiples include Price-to-Earnings (P/E), Price-to-Sales (P/S), and Enterprise Value to EBITDA (EV/EBITDA).
  • Adjust Multiples: This is a crucial step. The multiples derived from comparable companies may need to be adjusted to account for differences in the subject company. For example, if the company being valued has a higher growth rate or lower risk than the comparable companies, the multiples might be adjusted upwards. Conversely, if the subject company is smaller or has a higher risk profile, the multiples may be adjusted downwards.
  • Apply Multiples to Subject Company: Finally, apply the adjusted multiples to the financial metrics of the company being valued. This will give you a range of valuation estimates, which can be averaged to reach a single valuation figure or used to understand the potential range of the company’s value.

Cost Approach

The Cost Approach is all about breaking down the company into its individual assets and pricing them based on current market rates. Think of it as the price tag you’d put on various components like net working capital, machinery, real estate, and even intangible assets like brand value. This approach is particularly useful for capital-intensive businesses or holding companies where the sum of the parts may offer a realistic view of the business’s value.

Section 2: Valuation Discounts

Minority Interest Discount

In private companies, especially those closely held, a majority owner often has more control over cash flows. If you’re a minority owner, your share might be subject to a ‘valuation discount’ because you have less control over the business’s financial direction.

Lack of Marketability Discount

Private companies lack a public market for their shares, making them less liquid compared to public companies. This illiquidity is another reason a valuation discount may be applied to a private company’s value.

Key Man Discount

If the company heavily depends on one or a few key individuals, whose absence would significantly impact the business, a ‘key man discount’ might be necessary during valuation.

Section 3: Valuation Timetables

Expect a third-party valuation process to typically last about four weeks, given that the information available is of high quality. This period can include various activities, from financial scrutiny to interviews with the management.

Section 4: Special Considerations

Tax Implications

The possibility of changes in the tax law is one of the factors that motivates many business owners to seek the value of their privately held firm. For example, an increase in capital gains tax might considerably impact firm owners’ post-sale income. These possible developments sometimes cause owners to expedite their selling plans or investigate other financing arrangements. When evaluating a company, it’s critical to consider existing tax regulations as well as any impending changes since they might have an influence on the firm’s net cash flows and, thus, its valuation.

Economic Conditions

The economic climate can have a substantial impact on the valuation of a firm. Interest rates, inflation, and even geopolitical concerns can all impact investor confidence and, consequently, a company’s perceived worth. Higher interest rates, for example, might reduce the present value of a company’s future cash flows, lowering its valuation. Similarly, an economic downturn can diminish client demand, hurting sales and profit predictions. When establishing a business valuation, these macroeconomic aspects should be taken into account.


Valuing a private company is not straightforward; it involves multiple methodologies and considerations like the quality of available information, minority interests, and the business’s unique risks. Understanding these elements can offer a more accurate valuation and a clearer path for the company’s future planning.

And there you have it—a guide to valuing a private company. Whether you’re an owner considering a merger or an investor evaluating a potential opportunity, a sound understanding of these valuation methods is crucial.