Private Company Valuation – Know Your Worth

by | Aug 25, 2020


Private company valuation is the set of procedures used to place a value on a company’s current net worth. There are various reasons why a company valuation can be required – for the sake of awareness, legal purposes, or to determine the right price for sale.

As important as the process is, you could, however, face the following problems when valuing private companies:

  • There is no market value for debt or equity available readily
  • Market-price based risk measures, such as beta and bond ratings, are not available readily for private businesses and have to be benchmarked and adjusted according to the UAE market
  • The financial statements of private firms could potentially be following different accounting standards than those commonly accepted
  • It is often hard to differentiate salaries from dividends, and personal expenses from business expenses
  • Extreme conditions caused by events like the COVID-19 pandemic can be used by investors/buyers with a bias to undermine the value of a business based on current performance

Therefore, it is essential that the valuation is performed by knowledgeable individuals or institutions that do not have a bias towards the outcome.

Valuation Methods

The following are some methods that experts use for valuing private companies.

  • The Discounted Cash Flow (DCF) Method
    The Discounted Cash Flow (DCF) method is used by professional investors and financial analysts to determine how much to pay for a business. It is also used by decision-makers to determine whether a project will be a good investment, like for the launch of a new product line or purchasing a new manufacturing facility. The principle of this method considers that an investment now is worth an amount equal to the sum of all the future cash flows it will produce, with each of those cash flows being adjusted to reflect their present value. However, performing DCF analysis accurately requires considerable experience in financial modeling.
  • Comparable Company Analysis (CCA)
    The Comparable Company Analysis (CCA) method is a relative valuation technique used to value a company by comparing that company’s valuation multiples to those of its peers. Typically, the multiples are a ratio of some valuation metric, such as equity Market Capitalization or Enterprise Value, to some financial performance metric, such as Earnings Per Share (EPS), Sales, or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Even though this method is used widely, it could be influenced by temporary market conditions and become a less reliable method when the comparable companies are thinly traded.
  • The First Chicago Method
    The First Chicago Method is a hybrid technique that uses multiples to obtain a terminal value and discounts future cash flows to determine the present value. Generally, this method includes the formation of three scenarios: a best-case (based on performance that exceeds most expectations), a base-case (the most likely scenario), and a worst-case scenario. This private company valuation method can be used by venture capitalists and private equity investors as it provides a valuation that incorporates both the firm’s upside potential and downside risk. Early-stage investors, however, are not entirely comfortable with this approach because the projection of revenues for an early-stage venture is too unpredictable to provide assurance to these investors. This is now especially the case more than ever before, since the recent COVID-19 pandemic and global lockdowns have severely affected the markets and businesses worldwide.

Know your worth

Irrespective of the method you select to value your company, remember that if your business has experienced a downturn recently that has affected its financial performance, the value of the company may fall short of your expectations. In these uncertain times, not only will a professional be able to offer you an objective assessment of your business, but they will also be able to amalgamate multiple business valuation methods to get you the best and most holistic sense of what your business is worth.

At Affility Consulting, our experts take company valuations one step ahead and also offer guidance in terms of preparing teasers, projections, and investment models that can be useful in negotiations with investors.