Equity Markets, Valuation, and Analysis

CHAPTER 14Private Company Valuation

Onur Bayar

Associate Professor of Finance, University of Texas at San Antonio

Yini Liu

PhD Candidate, University of Texas at San Antonio

INTRODUCTION

Private company valuation is a challenging and often subjective exercise. Unlike publicly traded companies, a private company has no observable stock price to serve as an objective measure of the intrinsic value of its equity. Since no readily available market value exists for either a private firm's debt or equity, any valuation method inputs that require them, such as debt ratios for computing the firm's cost of capital, are harder to estimate. Similarly, risk measures based on market prices, such as beta and bond ratings, also are unavailable for private companies. Another challenge faced when valuing private companies is that their financial statements are likely to go back only a few years and have much less detail compared to publicly traded companies, which increases the difficulty of forecasting cash flows.

Private equity (PE) managers such as venture capitalists, entrepreneurs, investment bankers, and other outside investors use valuation methods to evaluate privately held companies as an investment opportunity. Damodaran (2018) describes three broad scenarios in private company valuation:

1. Private-to-private transactions, in which a private company is valued for sale by one individual to another.
2. Private-to-public transactions, in which a private firm is valued for an initial public ...