A Practical Guide to Private Company Valuations

The Value of Valuation

The value of assets and businesses in particular is constantly changing. Business valuation provides an estimate of an enterprise value at a particular moment in time. Notional valuation outside of a negotiated transaction amongst motivated counterparties serves as a baseline for performance assessment over time. It involves a comprehensive assessment of business fundamentals to identify key value enhancements that can be implemented leading up to a future sale or financing.

Insights into performance metrics, debt management capabilities, and growth potential enable informed decision-making, empowering business owners as they pursue strategic initiatives such as capital raises for acquisition or expansion.

A thorough valuation plays a fundamental role in guiding various aspects of corporate strategy and financial management.

Key Factors of Business Valuation

Quantitative

These are the corner stone of a business valuation, providing concrete measurable data about a business’s financial health and performance. Analysis of key financial metrics provides insight into the company’s financial stability, growth potential, and risk exposure.

Consistency of revenue growth over time.
Operational efficiency demonstrated through net income and profit margins.
Business sustainability and growth levels exhibited by earnings and cash flow outlook.
Financial position reflected by assets and liabilities on the balance sheet.
Capital structure and associated leverage risk.

Qualitative

Intangible considerations contribute to a holistic assessment of a company’s overall value and sustainability. Qualitative factors can complement quantitative analysis to enrich understanding around operational resiliency, competitive advantage, future potential, and risks.

Leadership team’s competence and expertise as well as succession readiness.
Brand reputation and perception in the market.
Demand and differentiation of core products and services
Diversity of customer base and longevity of relationships.
Innovation pipeline and ability to adapt to changing market needs.
Operational efficiency through digitally mature systems & processes and scalability of the business.
Supply of labor
Strong organizational culture

Approaches to Valuation

Asset-Based	Market	Income
Typically used for businesses whose value is tied to assets rather than operations. Focuses on a company’s net assets by uncovering the difference between the market value of total assets and liabilities. Also used where a business is operating at a loss or with low retention on assets.	Determines the value of a business or asset by leveraging observable market pricing of similar companies or recent transactions based on industry, size, geography, business model, etc. Often used as a secondary valuation approach due to limitations on comparability.	Assesses the value of a company based on its potential to generate future income streams. Analyzes historical financial data and projected earnings or cash flow to determine the company’s present value based on a market participant cost of capital. Different approaches may be used depending on expected stability of earnings.

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