in this tutorial we're gonna talk about
three different methods for private
company valuation private companies can
be challenging to value for a couple of
reasons first of all they don't have
public share prices
additionally private companies don't
have to follow the same reporting
standards and disclosure that public
companies are governed by this makes it
more challenging to find information on
them nonetheless there are some methods
we can use the three are comparable
company analysis precedent transactions
and discounted cash flow analysis let's
look at each of these three in more
detail comparable company analysis is a
method of looking at trading multiples
for public companies that are similar to
the company that's trying to be valued
it's important to note though that there
is a liquidity premium that's placed on
public companies and therefore a
liquidity discount has to be applied to
a private company because it's harder to
sell a private company it would not be
valued as highly as a public company
that's similar but the process to make
one of these columns tables is to
identify firms that have similar
businesses to the one you're trying to
value to collect their financial
information and calculate their trading
multiples and compute an average then
take that average and apply it to the
financial metrics for the firm you're
trying to value for example if the
average evita ebody in the industry is
13 times you would then apply a private
company liquidity discount say take it
down to 10 times and multiply the firm's
ebody that you're trying to value by 10
as an example now let's look at
precedent transactions precedents are
also a relative form evaluation meaning
we're looking at other companies and
we're looking at what they were acquired
for what was paid to by the entire
business so it includes a takeover
premium which might actually make it a
higher valuation than a regular public
company comparable it's important to
note that precedent transactions since
they took place in the past can become
stale dated if they're sour
years old you follow the same steps as
you did with comparable company analysis
to look at precedent transactions the
third approach is discounted cash flow
analysis using the DCF method it's a
form of intrinsic valuation meaning you
don't look at when any of their company
is worth instead you forecast the
company's financial performance into the
future the projections will include
several things like revenue operating
expenses capital costs etc and the
calculation of free cash flow to the
firm from their cash flow can be
discounted using the firm's weighted
average cost of capital the formula for
free cash roll of the firm is shown
below and covered in many of our other
tutorials finally putting it all
together it's important to show a range
of values for a private company here
we've shown comparable companies
precedent transactions and two different
discounted cash flow models on a chart
it's important to highlight that
valuation is more of an art than a
science
therefore we always present a range of
values for a business since is extremely
hard to pinpoint one value when so many
assumptions have to be made about the
future hopefully this has shed some
light on private company valuation
methods