Why Private Company Valuation Matters
The majority of companies in the world are private. They range from family-owned manufacturers to venture-backed unicorns to portfolio companies held by PE firms. Investment bankers encounter private company valuations constantly: advising on M&A transactions where the target is private, helping founders evaluate offers, pricing minority stake sales, and supporting LBO analysis where the target lacks public market data.
In interviews, "How do you value a private company?" is one of the most common valuation questions because it tests whether you understand not just the mechanics of valuation but also the judgment required when information is limited and market signals are absent. The candidate who can explain both the methods and the adjustments demonstrates deeper analytical maturity than one who only knows public company valuation.
- Discount for Lack of Marketability (DLOM)
A reduction applied to a private company's valuation to reflect the fact that its shares cannot be easily bought or sold on a public exchange. DLOM typically ranges from 10-30% and compensates investors for the illiquidity risk, longer time to exit, and transaction costs associated with private holdings.
The fundamental challenge is straightforward: public companies have a stock price that provides a real-time, market-based equity value. Private companies do not. Everything in private company valuation flows from this basic difference, requiring analysts to estimate value rather than observe it.
Public vs. Private Valuation: Key Differences
Before diving into methods and adjustments, understanding the core differences between public and private valuation sets the foundation for every technical discussion.
| Feature | Public Company | Private Company |
|---|---|---|
| Market price | Observable stock price | No market price; must be estimated |
| Financial data | Audited, standardized (SEC filings) | Often unaudited, inconsistent, or incomplete |
| Liquidity | Shares trade instantly on exchanges | Shares are illiquid, hard to sell |
| Investor base | Thousands of diversified shareholders | Concentrated ownership (founders, PE, family) |
| Discount rate | Standard WACC using market data | Higher WACC (200-500 bps premium for risk/illiquidity) |
| Control dynamics | Most trades are minority stakes | Transactions often involve majority/control positions |
| Comparable data | Abundant public peers and trading data | Limited comparable transactions, especially for niche businesses |
Valuation Methods for Private Companies
Comparable Companies Analysis
Comps analysis uses publicly traded peers as benchmarks, applying their trading multiples to the private company's financial metrics. If comparable public companies trade at 10-12x EV/EBITDA and the private company has $50 million EBITDA, the implied enterprise value range is $500-600 million before adjustments.
The key challenge is finding true comparables. Private companies often operate in niche markets or have business models that do not map cleanly to any public peer group. A private regional insurance broker, for example, has no direct public peers since publicly traded insurance brokers operate at much larger scale with different margin profiles and growth trajectories. Analysts must decide whether to use larger public brokers at a discount, broader financial services firms, or a mix of adjacent business models. When the comp set is imperfect, the valuation range widens, and judgment becomes more important.
Additional complications arise from financial data quality. Public comps report standardized financials under GAAP with audited statements. Private companies may use different accounting policies, commingle personal and business expenses (common in owner-operated firms), or lack the detailed segment reporting needed to calculate clean EBITDA. Analysts often need to normalize private company financials before applying public multiples, adjusting for owner compensation above market rates, one-time expenses, and related-party transactions.
After calculating the implied value from public comps, analysts typically apply a DLOM of 10-30% to reflect the illiquidity of private shares relative to freely traded public equity. A company worth $500 million on public comps might be valued at $375-450 million after a 10-25% discount.
Precedent Transactions
Precedent transaction analysis examines prices paid in prior M&A deals involving similar companies. This method is particularly valuable for private company valuation because the transactions themselves often involve private targets, making the data directly relevant.
Deal multiples from precedent transactions inherently include a control premium because acquirers pay above the standalone value to gain control. This means precedent transaction multiples typically run 20-40% higher than trading comps for the same industry.
The scarcity of data makes each available precedent more influential in the analysis, which is why analysts must carefully assess whether prior transactions are truly comparable in terms of size, industry, geography, and timing.
Discounted Cash Flow (DCF)
The DCF method values a company based on the present value of its projected free cash flows, making it particularly useful for private companies where comparable market data is limited. The framework is identical to public company DCF, as described in our DCF walkthrough guide:
Key adjustments for private companies:
- Higher discount rate: Analysts typically add 200-500 basis points to the WACC relative to public comparables to reflect greater risk, illiquidity, and information uncertainty. A public company might be discounted at 10% WACC while its private equivalent uses 12-14%.
- Less reliable projections: Private companies often lack the historical data quality and management guidance that support robust forecasting for public companies. Projections require more conservative assumptions and wider scenario analysis.
- Size premium: Smaller companies face higher business risk (customer concentration, key-person dependency, competitive vulnerability), which is captured through an additional premium in the cost of equity.
Get the complete guide: Download our comprehensive 160-page PDF covering valuation methods, financial modeling, and technical interview frameworks. Access the IB Interview Guide for complete preparation.
Asset-Based Valuation
Asset-based approaches value the company as the sum of its assets minus liabilities, adjusted to fair market value. This method is most relevant for:
- Asset-heavy businesses (real estate, natural resources, manufacturing with significant PP&E)
- Distressed companies where going-concern value is questionable
- Holding companies whose value derives primarily from separable assets
For operating companies in growing industries, asset-based methods typically produce values well below what comps or DCF suggest because they fail to capture going-concern value, growth potential, and intangible assets like customer relationships, brand equity, and proprietary technology. A private software company, for instance, might have minimal tangible assets (laptops, office furniture) but generate $20 million in annual recurring revenue, making an asset-based approach meaningless for estimating its true economic value.
- Normalized Earnings
Adjusted financial results that remove one-time, non-recurring, or owner-specific items to reflect the true ongoing earning power of a private business. Common normalizing adjustments include replacing above-market owner compensation with market-rate salaries, removing personal expenses run through the business, and excluding non-recurring legal settlements or restructuring charges.
However, asset-based valuation serves as a useful floor value or sanity check. If a DCF or comps analysis produces a value below the liquidation value of the company's assets, something is likely wrong with the assumptions. It also plays a critical role in distressed situations where the relevant question is not "what is the business worth as a going concern?" but rather "what can creditors recover if the company is wound down?"
Key Adjustments in Detail
Discount for Lack of Marketability (DLOM)
The DLOM reflects the cost of illiquidity that private company investors bear. Public shareholders can sell their shares instantly at the market price. Private shareholders may wait months or years for a liquidity event, face significant transaction costs, and have no guarantee of finding a buyer at their desired price.
- Size Premium
An additional return premium demanded by investors for holding shares in smaller companies, reflecting their higher business risk, less diversified operations, and greater vulnerability to competitive and economic shocks. In private company valuation, the size premium is typically added to the cost of equity, increasing WACC by 100-400 basis points depending on company size.
DLOM studies typically reference two empirical sources: restricted stock studies (comparing the price of restricted vs. freely traded shares of the same company) and pre-IPO transaction studies (comparing private transaction prices to subsequent IPO prices). These studies support a range of 10-30%, with the exact discount depending on the company's size, industry, growth prospects, and proximity to a potential liquidity event.
Control Premiums
When valuing a controlling interest in a private company, the buyer gains the ability to set strategy, replace management, control capital allocation, and decide the timing of an exit. This power is worth a premium over the per-share value of a minority stake.
Control premiums in private transactions typically range from 20-40% and are justified by the value a buyer can unlock through operational changes, cost synergies, or strategic repositioning. The size of the premium depends on how much value the buyer believes they can create relative to the status quo.
Cost of Capital Adjustments
Private companies face a higher cost of capital than public companies for several reasons:
- Information risk: Investors have less visibility into financial performance
- Illiquidity risk: Capital is locked up for longer periods
- Size risk: Smaller companies have more concentrated and volatile earnings
- Financing constraints: Private companies have fewer options for raising capital
These adjustments are cumulative. A private company that is smaller, less transparent, and more illiquid than its public peers may have a WACC that is 300-500 basis points higher, which can reduce the DCF-implied value by 25-35%.
Interview Framework
A strong interview answer acknowledges that private company valuation is more art than science compared to public company analysis. The methods provide a framework, but the specific adjustments require judgment calls about comparable selection, discount magnitude, and projection reliability.
When discussing specific adjustments, cite ranges rather than single numbers: "I would apply a DLOM of 15-25% depending on the company's size and proximity to a liquidity event" is stronger than "I would apply a 20% discount." Ranges demonstrate that you understand the judgment involved.
For candidates targeting PE roles, connect private valuation to enterprise value calculations and explain how PE firms use these techniques to determine maximum purchase prices in LBO analysis, where the valuation directly determines the financing structure and expected returns.
Be prepared for follow-up questions that test deeper understanding. Interviewers may ask "How would you value a pre-revenue startup?" (revenue multiples from comparable fundraising rounds, or a DCF with highly speculative projections and very high discount rates), "What if there are no comparable public companies?" (broaden the peer set geographically or use adjacent industries, lean more heavily on DCF and precedent transactions), or "How does the DLOM change if the company is planning an IPO in 12 months?" (the discount narrows significantly because liquidity is imminent, possibly to 5-10% rather than the standard 15-25%). These follow-ups test whether you understand the principles well enough to apply them in non-standard situations.
Practice on the go: Use our iOS app to drill private company valuation questions and test your understanding of DLOM, control premiums, and cost of capital adjustments.
Key Takeaways
- Private companies are valued using the same methods (comps, precedent transactions, DCF) as public companies, with adjustments for illiquidity, limited data, and control dynamics
- No market price exists, so all valuation must be estimated rather than observed, requiring more judgment throughout the process
- DLOM of 10-30% is applied to reflect the illiquidity of private shares relative to freely traded public equity
- Higher cost of capital (200-500 bps WACC premium) accounts for information risk, illiquidity, and size-related business risk
- Control premiums of 20-40% apply when valuing majority/controlling stakes because the buyer gains the ability to influence strategy and operations
- Data limitations mean smaller comp sets, fewer precedent transactions, and less reliable financial projections, all of which widen the valuation range
- In interviews, structure your answer in three parts: same methods, key differences, specific adjustments with ranges
Conclusion
Private company valuation builds on the same analytical foundation as public company valuation but demands significantly more judgment at every step. The absence of a market price, the limitations of available data, and the importance of liquidity and control adjustments mean that two skilled analysts can arrive at meaningfully different conclusions for the same private company.
This ambiguity is exactly what makes private valuation a favorite interview topic. Candidates who can explain the methods, articulate the adjustments with specific ranges, and acknowledge the inherent uncertainty demonstrate the analytical maturity that interviewers reward. The goal is not to calculate a precise number but to show that you understand the framework and the judgment calls required to apply it in practice.
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