Understanding the Valuation Process in Private Stock Markets

Why do private companies undergo valuation?

Variation is crucial for companies, businesses and for investors. For a company, it can help evaluate its success and progress and track its market performance compared with others. For investors valuation helps them know the worth of potential investments. They usually do this through information and data shared publicly by a company. Irrespective of who or what the valuation is for, it describes the worth of a company.

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

The major difference between the two is in the availability of market dynamics and information. You can easily find the financial data of public companies since they are traded publicly and are subject to market forces. However, private companies don't have full disclosure requirements. They also don't have liquidity in their shares and mostly rely on fundamental analysis. Valuing a private company requires you to gather information from different sources and use various approaches to estimate their worth and consider factors that are specific to the company and its industry. However, platforms like https://www.hiive.com can provide liquidity for private companies shareholders, helping them facilitate the sale of private stocks in a regulated marketplace.

How professionals value a private company

There are various methods used to value private companies. Sometimes, these methods are combined to provide a valuation range. Let's explore some of them.

Discounted Cash Flow (DCF)

In the discounted cash flow method, the present value of a company’s future cash flow is estimated. This is usually done in three steps. First, the future cash flow is projected. This is usually projected over a specific period and involves tax payments, operating income, and changes in capital expenditures and working capital. Second, the discount rate is determined. It usually considers the company’s capital structure, debt, and equity cost. Finally, the projected cash flows are discounted to their current value using the discount rate.

Comparable company analysis

Here are the financial ratios, metrics, and valuation multiples of the private company compared to a similar company. Comparable company analysis utilises the financial performance and market value of the comparable company to estimate the target company’s valuation range. The steps include identifying comparable companies, gathering financial data, and analysing valuation metrics.

Asset-based approach

Here, the company’s value is determined based on its Net Asset Value (NAV). There are two methods commonly used: the book value method and the liquidation value method. In the book value method, the company’s net asset is calculated by subtracting total liabilities from the fair market value of the whole asset. In the liquidation value method, the value of a company’s asset is estimated in a liquidation scenario by considering the fair market value of saleable assets like real estate, inventory, and equipment.

Endnote

Private company valuation can be quite complex because of unique characteristics and limited financial information, making it full of assumptions, industry averages and best guess estimates. However, there are many other methods that are used by the corporate finance advisory and private equity industry to determine the valuation of a private company.