Question

what is the best valuation method for a private firm? why

Answer 1

1 Comparable Company Analysis (CCA)

The Comparable Company Analysis (CCA) method operates under the assumption that similar firms in the same industry have similar multiples. When the financial information of the private company is not publicly available, we search for companies that are similar to our target valuation and determine the value of the target firm using the comparable firms’ multiples. This is the most common private company valuation method.

To apply this method, we first identify the target firm’s characteristics in size, industry, operation, etc., and establish a “peer group” of companies that share similar characteristics. We then collect the multiples of these companies and calculate the industry average. While the choices of multiples can depend on the industry and growth stage of firms, we hereby provide an example of valuation using the EBITDA multiple, as it is one of the most commonly used multiples.

The EBITDA is a firm’s net income adjusted for interest, taxes, depreciation, and amortization, and can be used as an approximate representation of said firm’s free cash flow. The firm’s valuation formula is expressed as follows:

Value of target firm = Multiple (M) x EBITDA of the target firm

Where, the Multiple (M) is the average of Enterprise Value/EBITDA of comparable firms, and the EBITDA of the target firm is typically projected for the next twelve months.