Private Company Valuation Methods and Techniques

Why Private Company Valuation Matters

Valuing companies is at the core of investment banking, private equity, and corporate finance. While many are familiar with valuing public companies, valuing private companies introduces unique challenges. The absence of market prices, limited financial disclosure, and lower liquidity all impact methodology and assumptions.

For interview prep, understanding these differences is critical. Questions like “How do you value a private company?” or “What’s different from valuing a public company?” are common in both investment banking and private equity interviews.

Key Challenges in Valuing Private Companies

1. Lack of Market Price

Public companies have a stock price that reflects investor sentiment and provides a real-time equity value.
Private companies don’t trade on exchanges, so there’s no observable market capitalization. Analysts must estimate equity value using alternative approaches.

2. Limited Financial Disclosure

Public companies file audited statements with regulators (10-K, 10-Q).
Private companies often provide limited, unaudited financials. Information may be inconsistent or missing, making analysis more difficult.

3. Liquidity and Marketability

Shares in public companies can be sold instantly in open markets.
Private company shares are illiquid and harder to sell. This justifies a discount for lack of marketability (DLOM) when comparing to public peers.

4. Control Considerations

Public company valuations often assume minority stakes.
Private transactions may involve majority or controlling stakes, requiring adjustments such as a control premium.

Common Valuation Methods for Private Companies

Despite the challenges, many of the same valuation frameworks apply to both public and private companies. The key is adjusting for differences.

Comparable Companies Analysis (Comps)

Use publicly traded peers as benchmarks.
Apply valuation multiples (EV/EBITDA, EV/Revenue, P/E) to the private company’s financials.
Adjust downward for illiquidity and smaller size.
Challenge: Finding true peers may be difficult, especially if the private company operates in a niche market.

Precedent Transactions

Examine prices paid in similar private M&A deals.
Provides insight into control premiums and industry-specific trends.
Challenge: Transaction data may be limited or undisclosed, especially for smaller deals.

Discounted Cash Flow (DCF)

Project free cash flows and discount them using an appropriate cost of capital.
Particularly useful when comparable data is limited.
Challenge: Forecasting private company cash flows is harder due to less reliable historical data.
The cost of equity is often higher for private firms, reflecting higher risk and illiquidity.

Asset-Based Valuation

Value the company based on its assets minus liabilities.
More relevant for asset-heavy businesses (e.g., real estate, natural resources).
Less useful for service-oriented or growth companies.

Market Method (Rule of Thumb)

Some industries use revenue or earnings multiples as rough benchmarks (e.g., 2x revenue for small SaaS firms).
Provides a quick directional check but lacks precision.

Adjustments for Private Company Valuation

1. Discount for Lack of Marketability (DLOM)

Private shares are harder to sell, so investors apply a discount to valuation.

Ranges from 10–30% depending on size, industry, and investor appetite.
Justified because liquidity risk reduces investor willingness to pay.

2. Size Premium

Smaller private companies often face more operational and financial risk.

Analysts may increase the discount rate (cost of equity) to account for this.
Leads to lower valuations compared to larger, established peers.

3. Control Premiums

If valuing a controlling stake, buyers may pay a premium for the ability to influence strategy, replace management, or restructure the company.

Control premiums typically range from 20–40%.

4. Cost of Capital Adjustments

Public companies can issue bonds or equity more easily, reducing financing risk.
Private companies have fewer financing options, so analysts may increase the weighted average cost of capital (WACC).

Real-World Examples

Private Tech Startup vs Public Peer: A SaaS startup might be valued at 8x forward revenue, while a public peer trades at 10x. The difference reflects discounts for smaller scale, illiquidity, and execution risk.
Family-Owned Manufacturer: Valuation may rely heavily on asset-based methods and precedent transactions because financial disclosures are limited.
Private Equity Acquisitions: PE firms often negotiate aggressively based on illiquidity discounts, then work to improve operations before exiting at higher public multiples.

Practical Considerations in Interviews

If asked in an interview: “How do you value a private company differently from a public one?”

A strong answer includes:

1. You can still use comps, precedents, and DCF.

2. But you must adjust for lack of market price, limited disclosures, illiquidity, and control premiums.

3. You may apply a DLOM and use higher discount rates.

4. Data quality and availability are much bigger issues than with public companies.

This shows you understand both the technical and practical aspects.

Key Takeaways

Private companies lack market prices, so valuation must be inferred from comparables, deals, or cash flows.
Information is limited, making analysis less precise than for public firms.
Liquidity matters: Discounts for lack of marketability reduce valuations relative to public peers.
Ownership structure is critical: Control premiums and transaction context can swing valuations significantly.
DCF and precedent analysis are particularly useful when reliable comps or financials exist.

Conclusion

Private company valuation builds on the same foundations as public company valuation but requires important adjustments. Illiquidity, lack of disclosure, size, and ownership considerations all affect the outcome.

For candidates, the key is to clearly articulate these differences, cite examples, and explain adjustments like DLOM or size premiums. Doing so shows that you not only understand valuation theory but also how it applies in the practical, less transparent world of private markets.

Private Company Valuation Explained