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.

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