Valuing Private Companies

March 31 2011| Filed Under » Fundamental Analysis, Investment Banking, IPO, Private Equity, Stock Analysis, Stocks, Underwriting

While most investors are versed in ins and outs of equity and debt financing of publicly-traded companies, few are as well-informed about their privately-held counterparts. Private companies make up a large proportion of businesses in America and across the globe; however the average investor most likely cannot tell you how to assign a value to a company that does not trade its shares publicly. This article is introduction to how one can place a value on a private company and the factors that can affect that value.TUTORIAL: DCF Analysis

Private and Public Firms

The most obvious difference between privately-held companies and publicly-traded companies is that public firms have sold at least a portion of themselves during an initial public offering (IPO). This gives outside shareholders an opportunity to purchase an ownership (or equity) stake in the company in the form of stock. Private companies, on the other hand, have decided not to access the public markets for financing and therefore ownership in their businesses remains in the hands of a select few shareholders. The list of owners typically includes the companies' founders along with initial investors such as angel investors or venture capitalists.

The biggest advantage of going public is the ability to tap the public financial markets for capital by issuing public shares or corporate bonds. Having access to such capital can allow public companies to raise funds to take on new projects or expand the business. The main disadvantage of being a publicly-traded company is that the Securities and Exchange Commission requires such firms to file numerous filings, such as quarterly earnings reports and notices of insider stock sales and purchases. Private companies are not bound by such stringent regulations, allowing them to conduct business without having to worry so much about SEC...