Private Company Valuation: Everything You Need To Know Private Company Valuation: Everything You Need To Know

Private Company Valuation: Everything You Need To Know

15 January 2021 | Published in Business Valuation Methods. Read 3366 times.

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Determining private companies' value is more challenging than the valuation of public companies.

What is a Private Company?

A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges. Like public companies (companies lacking in the stock market), private companies can be valued - that is, their value can be valued. But the job of valuing a private company is much more difficult.

Why Does the Valuation of a Private Company much Harder?

There are three main reasons for these difficulties - lack of publication of financial statements, different accounting standards, and a high probability of accounting entries unrelated to its economic activity.

Although there are some unique challenges involved, the fundamental approach to valuation is the same

1. Lack of publication of financial statements:
Public traded companies publish their financial reports. This public data allows for creating metrics to help evaluate publicly traded companies. On the other hand, private companies are not required to publish their financial reports. The lack of private data does not allow the building of a parallel data matrix for private companies. Therefore private company valuation poses some specific challenges not faced in the valuation of publicly-traded companies.

2. Different accounting standards relative to publicly traded companies:
The accounting standards for private companies are often less stringent than publicly traded companies, so their financial statements may be less standardized and lack the clarity of a public company's metrics.

3. a high probability of accounting entries unrelated to its economic activity:
In many cases, the company's financial sources are used by the shareholders. Such issues must be resolved before performing valuing a private company.

What is the main difference between the valuation of a private company and the valuation of a public company?

When you compare a private company's value to a public company's value, you find that the main difference between them is the lack of liquidity of a private company. The shares of a private company are not traded on the stock exchange, so they should be worth less. The reduction in value is called Discounts For Lack Of Marketability (DLOM).