Question

Explain any special considerations that might be inherent when valuing a private company.

Answer 1

Special considerations inherent in valuing a private company as against valuing a public company:

1. Private companies lack publicly available data. Therefore, Private company valuation is based on estimates and assumptions.

2.Private companies do not have publicly available data

regarding the cost of debt to derive YTM. But it can be derived by analyzing available credit ratings of available companies.

3.Calculation of beta requires stock returns which do not exist for private companies. The comparable company data used for debt analysis can be used to find out the beta for the company.

4.Private companies are smaller than public company. Therefore, a size premium is used in the valuation.

5.The capital structure of a private company is based on the comparable companies in the industry.

6.Valuation of private companies tends to be expensive due to lack of availability of information.

7.Private company valuations are discounted based of the risk factors associated with investing in a private company.

8.For private companies, some non-traditional approaches are considered more appropriate such as analysis of invested capital, replacement cost and asset appraisal.

9.Multiples of private companies must be adjusted for lack of liquidity.

10.When valuing a private company using discounted cash flow analysis, consideration must be given to recasting the financial statements to mirror public companies.

I hope that was helpful :)