Business Valuation Blog | Understanding Buying / Selling a Company

Using Public Company Data to Determine Private Business Value

Posted by Business Valuation Specialists LLC on Dec 6, 2021 7:00:00 AM

Business Valuation Public Company Value Private Company

When you are trying to determine the overall value of your business, a certified appraisal is a great place to start. If you are a business owner, and your company’s stock is not traded publicly, it is considered a privately held concern. There are a few distinct variances between private and public company valuation methodologies. Understanding the potential approaches the appraiser will take to value your private company while using data from public businesses, is important as you work with them to develop a realistic and supportable value.

When private businesses are appraised, there are a number of approaches that are considered. For the majority of ongoing enterprises, the income and market approaches are measured and weighed to ultimately determine the most accurate value for your company. When the market approach is utilized, the business may be compared to a similar public company, while making adjustments that look to match the public company as closely as possible. The income approach will review historic and current revenues and expenses, in an effort to reasonably discount cash flows over a future earnings period.

There are other, deeper approaches the appraiser will consider as well, within the market and income methodologies.

Under the market approach, there is both a “Guideline Public Company Method” and a “Guideline Company Transactions Method” used for private businesses.

The first option reviews financial data that is freely available from similar publicly traded businesses. It considers the actual price investors would pay for a minority interest in the public company as the basis for the valuation. The public businesses targeted for comparison are typically in the same industry and market as the private company, with a similar business model.

The second “transactions” method may be considered if a public company has recently been sold which closely fits the structure of the private company, within the same business sector. Financial data may not be available, however, details of the sales transaction can be reviewed and weighed in the appraisal effort. Under the income approach, the “Multiple of Discretionary Earnings Method” and “Gross Revenue Multiple Method” are the two most commonly used for private companies.

Within the first of these, if your business is simply too small to compare to a public entity under the market guideline methods, this alternate approach might be more applicable. It looks solely at financial statements and adjusted earnings by deducting discretionary expenses from the bottom line of the typical public company model to create a reasonable multiple of adjusted earnings, which is then applied to your private business’s adjusted earnings.

Under the second income method, the gross revenue of a typical public company in your market is considered to estimate a multiple, which is then applied to your private company's revenue, to determine value. This method doesn't consider profitability, which may be a factor that will affect the appraisal.

Engaging with a certified business appraiser will start the process of valuing your private company and all of the potential methodologies considered in the process. The results will assist you in the potential sale of your company, or offer support when considering refinancing, new investment, updating company practices, and adapting to new markets.

Tags: Business Appraiser, business valuation approaches, business appraisal services, private company valuation, public company

What exactly happens during a private company valuation?

Posted by Business Valuation Specialists LLC on Mar 28, 2018 9:37:00 AM

When you're trying to determine the overall value of your business, a private company valuation can go a long way towards figuring out that value. But what happens during the process? How are valuations for private companies different than those for other businesses? Here's a quick look at the overall process and how the different factors and methods can impact your company's calculated appraisal.

What exactly happens during a private company valuation?

When private companies are valued, there are a number of approaches that can be used. For most successful businesses, income or market approaches are typically used to give you the most accurate value for your company. When market approaches are used, the private company is often compared to a similar public company, with adjustments made to the private company's value to make it match the public company as closely as possible.

However, there are still several different approaches even within the data that was available. Here's a quick look at the four main types of methods used when market approaches are used:

  • Guideline Public Company Method - When this type of valuation method is used for private companies, the financial data that is freely available from publicly traded businesses is used. The actual price that investors choose to pay for the minority interests in public companies is used as the basis for the valuation. The public businesses that are used to help determine private business values are typically in the very same or in a similar business as the private business.
  • Guideline Company Transactions Method - When companies that are in a same or similar line of business as the company that is being valued, but it is closely held and not often traded on the open market, this method is used to determine private company value. Generally speaking, both companies will have several similar characteristics. This can include the sector, the business size, the products and services offered and the location where it does business. The transactions of the publicly held company will be used to determine the transaction value of the private company, with more weight given to more recent transactions.
  • Multiple of Discretionary Earnings Method - When a company is just too small for the guideline company transactions method to be used, this method works well. Smaller public companies can have their financial statements adjusted to reflect a private company. It compares public company adjusted earnings into the discretionary earnings to determine transaction value, creating a multiple for the private company's earnings.
  • Gross Revenue Multiple Method - Another method used for smaller businesses, this takes the company's revenue divided by the transaction prices. This allows the appraiser to develop a gross revenue multiple, which is multiplied into the private company's revenue to determine the value. Unfortunately, this method doesn't look at factors such as whether both businesses are profitable, unprofitable or on the same level of profitability.

By understanding how a private company valuation happens, it becomes much easier to understand how your company's value is calculated. It also allows you to see how you can change those numbers by adapting your business practices to the insights you've obtained from the appraisal report. This helps you improve your company's value in the long run and can help maximize the return on your investment when it's time to make an exit strategy.

Tags: private company valuation