Private companies play a major role in the U.S. economy. There are over 30 million private companies throughout the country ranging from small retail stores to national corporations. Whether you are preparing to sell, attract investors, or pursue future growth, understanding your company’s value is essential. This is where private company valuation comes in. A private company valuation determines a private business’s fair market value. To do so, business appraisers analyze the company’s financial performance, market position, and other key factors. In this article, we explain how to value a private company and what factors affect the valuation.
Peak Business Valuation has extensive experience valuing private companies across the United States. To learn more about receiving a private company valuation, contact Peak! Begin today by scheduling a free consultation below.
Why Valuing a Private Company is Different
Valuing a private company is often more complex than valuing a publicly traded business. Public companies have readily available stock prices and financial information. As a result, estimating their value is often more straightforward. Private companies, on the other hand, do not trade on public exchanges and their financial data is often not publicly accessible.
As a result, business appraisers rely on several sources of information to determine fair market value. These often include financial statements, industry research, comparable transactions, and other valuation techniques. Valuation experts also consider value drivers and risks unique to private businesses. Common examples include owner dependence, customer concentration, and limited marketability. Navigating these challenges can make private business valuation complex. Obtaining a professional business valuation is often the most reliable way to understand a private company’s worth.
Step-by-Step Valuation Process
Learning how to value a private company starts with a structured valuation process. Business appraisers gather financial data, analyze the company’s strengths and weaknesses, and apply valuation approaches to determine fair market value. In the following sections, we discuss the key steps involved in valuing a private company.
Step 1: Gather Financial & Operational Data
The first step in valuing a private company is gathering financial and operational information. Because private companies do not publicly disclose financial data, business appraisers rely on records provided by the owner. Common documents include income statements, balance sheets, and tax returns from the previous 3-5 years. When available, valuation experts also review financial projections.
In addition to financial records, business appraisers review factors that may affect future performance. These factors can include customer concentration, competitive advantages, intellectual property, and growth opportunities. Gathering complete and accurate data is essential for the quality and reliability of the valuation.
Step 2: Apply Appropriate Valuation Approaches
After gathering information, business appraisers determine which valuation approaches are most appropriate for calculating fair market value. The selected approaches depend on the company’s unique characteristics. Factors such as industry, financial performance, growth potential, and asset structure often influence this decision. The three most common valuation approaches include:
- Market Approach: This approach values a private company by comparing it to similar businesses that have sold recently. Business appraisers often rely on valuation multiples and comparable transaction data. These resources help appraisers determine the company’s fair market value.
- Income Approach: The income approach values a company based on its expected future earnings or cash flow. Valuation experts project the business’s future earnings, then discount them to a present value. This technique is often used for businesses with stable and predictable financial performance.
- Asset Approach: This approach estimates value based on the company’s net assets. Business appraisers calculate this by subtracting liabilities from assets. The asset approach is most common for asset-heavy businesses.
Business appraisers often consider multiple approaches when deciding how to value a private company. This well-rounded approach ensures a credible fair market value conclusion.
Peak Business Valuation has valued hundreds of private companies nationwide. We are happy to help you understand your business’s worth. Schedule a free consultation with Peak today to learn more!
Step 3: Consider Private Company Risks & Adjustments
An important part of learning how to value a private company is evaluating risk. Private companies often face challenges that can affect their value. These risks often come from owner dependence, customer concentration, or limited growth opportunities. Business appraisers assess these factors to better gauge the business’s current worth and future potential.
Valuation experts may also apply adjustments that are common in private company valuation. For example, private businesses are often less marketable than public companies because they are more difficult to buy and sell. When this is the case, the business may be valued lower than its public counterpart. Considering these risks and adjustments helps ensure a fair and reliable valuation conclusion.
Step 4: Prepare the Valuation Report
The fourth step of learning how to value a private company is to prepare the valuation report. This report explains the methodologies and results found during the business valuation, such as the company’s fair market value, strengths, weaknesses, opportunities, and risk profile. With this insight, business owners and other professionals gain a clear understanding of the company’s worth. They can use this information to address challenges and plan for future opportunities.
When Should You Hire a Professional Business Appraiser?
Whether valuing a public or private company, hiring a professional business appraiser is always a good idea. Online valuation tools can provide rough estimates, but they often overlook important factors affecting value. Private companies may require even more analysis because their financial information is not publicly available. For this reason, many business owners rely on professional appraisers to determine a credible fair market value.
Below, we list common situations that benefit from the help of an accredited valuation expert:
- Preparing to sell
- Mergers and acquisitions
- Partner buyouts
- Estate planning
- Litigation
- SBA financing
Check out When to Hire a Business Appraiser to dive deeper.
Conclusion
Understanding how to value a private company can support more informed financial decisions. A reliable valuation provides valuable insight into your company’s worth. This can be helpful when preparing for a sale, seeking investors, or planning for future growth. Every private business has unique characteristics that can affect value. As such, working with a professional business appraiser is often the best way to obtain a credible valuation. With the right guidance, you can move forward with confidence and make decisions that support your long-term goals.
As a trusted business appraiser, Peak Business Valuation regularly values private companies. If you have any questions about valuing your private business, contact Peak. Schedule a free consultation with Peak today to get started!
