Common Private Company Valuation Methods: Asset Based, Discounted Cash Flow, Market Value

While the preceding approach for calculating Enterprise Value as a multiple of EBITDA, as determined by a variety of business characteristics, is most commonly used in private equity and investment banking, it is not the only method for valuing private companies.

Asset Based Valuation Method: This method analyses the company's balance sheet by subtracting the total liabilities value from the total net asset value. An asset-based valuation can be approached in two ways:

• Going Concern Approach: If the company intends to continue operations without selling any assets right away, the going-concern approach to asset-based business valuation should be used.

• Liquidation Value Approach: If, on the other hand, the company is closing down, the liquidation value asset-based valuation technique should be used. The value is based on the net cash that would exist if the business was terminated and the assets were sold. Predictably, this method frequently results in a valuation that is lower than the true market value.

Discounted Cash Flow (DCF) Valuation Method: The DCF valuation method, often known as the income approach, is more reliant on a company's financial data. This enables one of DCF’s key advantages over other valuation techniques: it analyses companies on an absolute basis, removing subjectivity. A business is valued using DCF based on its projected cash flow over a reasonable time period, which is then adjusted to present value using a reasonable discount rate.

Market Value Valuation Method: This method compares a company to others in its industry. In an ideal world, a company would use financial data from previous transactions to arrive at an accurate valuation. As stated at the outset of this piece, some business owners use market capitalization data about public firms in their field to estimate a value for their companies based on industry averages. A word of caution: this strategy ignores variations in capability, predicted growth rates, intangible assets, and other pertinent aspects. At best, an increase in the average market capitalization of public companies in their industry may suggest a significant growth rate for the market as a whole.