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How to Value a Private Company

Posted by Lloyd Bell on Jul 9, 2019 10:13:00 AM

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Valuing a private company requires more than simply applying technical models. It also requires complete understanding of business operations, economic and industrial conditions, tax laws, and knowledge of the current capital markets. You can trust the valuation consultants at Meaden & Moore to be well-versed in all these areas and more. The need for valuing a private company may vary, but the approach is largely the same.

Private Companies Must Carefully Assess Operations Before Assigning Value

Unlike their public-company counterparts, private companies have no way to measure company value due to the lack of a ready market. The public-company stock listings reflect actual transactions, something that a private company is not likely to undertake until the owner is ready to leave the business. Not surprisingly, the way private company owners estimate their value is by applying a multiple to their earnings. The answer to building value is obviously to grow earnings, right? Not always.

Improving the Multiple

Of the two variables in the simplified value calculation, little thought is given to the multiple and how it can be improved upon. The multiple earned in a sale is a reflection of the perceived investment risk in a specific company, not the risk of investment in all companies within a particular industry or size. That is why it is inaccurate to simply apply an industry average to a specific company.

In order to improve the multiple for a specific company, one must first understand the specifics of the company and find ways to mitigate the investment risk. A company with an updated strategic plan that guides its operations has started down the path towards risk mitigation and therefore value improvement.

Reducing Risk and Increasing Value

Earnings are not just the result of having a superior product or service. They are also the result of company leadership, an organized sales function and strong financial management. Employees and investments in capital or technology also impact earnings. To protect the sustainability of the earnings and reduce the risk of achieving them, owners must assess how they rate in a number of different areas of the business and identify areas for improvement.

By making improvements where the company is weak, leadership reduces risk and increases value without detracting from company profitability. In all likelihood, these changes will also result in improved earnings, thereby amplifying the impact on company value.

At the end of the day, the value of a private company is ethereal and only exists when a transaction occurs. It is far better to take the steps to improve the company’s risk profile before initiating a transaction. Owners will have more control over the value, not the buyer who makes these improvements after the sale is achieved. The following whitepaper will give an overview of how to value a private company.

Download our whitepaper: "How to Value a Privately-Held Business"

Lloyd Bell

Lloyd Bell

Lloyd W.W. Bell III is Director of the Cor­porate Finance Group at Meaden & Moore. He has over 20 years of experience in financial management.

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