Private Company Valuation
Valuation is a process used to determine what a business is worth. Determining a private company’s worth and knowing what drives its value is a prerequisite for deciding on the appropriate price to pay or receive in an acquisition, merger transaction, corporate restructuring, sale of securities, and other taxable events. Private companies may include small family-owned enterprises, divisions/subsidiaries of larger private companies, or large corporations.
Finding the true intrinsic value of a private company is a tricky task. It entails a set of calculations and assumptions based on industry-wide and company specific statistics- key planning, adjusting of financial statements and applying the appropriate business valuation methodology.
Several Key factors add to the complexity- size, lack of operational history, management, and operational control, difficulty quantifying earnings and cash flow, capital structure, and risk in the business.
The cost of capital for private companies is different since they do not have access to capital via equity markets. The key is to determine the type of the company involved, whether it is a private or a publicly traded company, and its appropriate industry.