Business Valuations for Public vs Non-Public Companies

For both public and non-public companies, a business valuation indicates how much that company is worth according to the market, which includes market participants and investors.

However, a public company has shares that are traded on the stock exchange and the shares for a private, or non-public company, are not. This is a crucial differentiation and analyzing how the valuation strategy varies depends upon whether or not the company is public.

It is much easier to valuate publicly traded companies rather than private ones. This is because there is much more information that is readily available about public companies, as companies that are publicly traded on the stock exchange are required to file quarterly and annual financial reports with their status and earnings. Additionally, public companies are able to gain capital from outside investors that affect their valuation.

Types of Valuation Methods

For both public and private companies, there are three types of valuation methods that are commonly used: comparable company analysis, discounted cash flow (DCF) analysis, and the asset based valuation method.

Comparable Company Analysis (CCA)

A comparable company analysis uses information from similar public companies to establish a relative valuation of the businesses. This is the most common valuation method for private companies, when information about the specific company is not easily accessible. This method is based off the assumption that within the same industry, similar firms have similar multiples, which is just a ratio that measures some aspect of a company’s financial well-being. Through this method, a private company can be valued by estimating the cash flow using financial information from similar publicly traded companies.

Discounted Cash Flow Analysis (DCF)

The most common business valuation method for publicly traded companies is usually the discounted cash flow. Unlike the comparable company analysis above, a DCF can measure the intrinsic value of a businesses, which is the current value of all expected cash flows using the appropriate discount rate. This is usually cited as the most accurate type of businesses valuation and requires an intense amount of detail and analysis. Due to the fact that so much information is required, it is almost impossible to conduct a DCF for a private company without knowing their revenue totals.

Asset Based Valuation Method

This method bases the value of your company as the net asset value subtracted by the total value of its liabilities. There are two approaches to this method:

  • The going concern approach assumes the business is going to continue its current operations without immediately selling assets.
  • The liquidation value approach should be used if the business is going to cease to exist and use the net cash value that would exist if the business was liquidated and sold all of its assets.

In addition to the three methods outlines above, there are many ways to value companies. However, the biggest difference between valuation for public versus non-public companies is that the data points for public companies are based on reported numbers and totals, while the data points for private companies are based on assumptions and estimations.