Private company valuation 101

Why private companies are hard to value

Public companies have a price that updates every second, built on disclosure, liquidity, and decades of market infrastructure. Private companies have none of that. There is no continuous quote, few clean comparables, and disclosure happens only when the seller chooses. Every private valuation is an estimate standing in for a price that does not exist yet. That is the first thing to accept: you are not looking up a fact, you are building a defensible opinion.

The three methods, and how each one lies

Most valuations lean on three approaches. Each is useful, and each misleads if you trust it blindly.

Comparable companies. You find public companies in the same sector and apply their multiples. The problem is that a private company is not a smaller public one. It is less liquid, more concentrated, and usually more dependent on one or two people. Borrowing a public multiple without a discount for those realities overstates value.

Precedent transactions. You look at what similar companies sold for. This feels solid because these are real deals at real prices. But every precedent had its own private logic: a specific buyer, a specific strategic reason, a specific moment. Borrow the multiple without the context and you anchor to the wrong number with great confidence.

Discounted cash flow. You project future cash and discount it back. For a mature business this can be rigorous. For an early or volatile one, it is mostly an exercise in how you feel about the assumptions, dressed up as math.

The honest practitioner uses all three as a triangulation, not as an answer, and spends most of the energy on the assumptions, not the arithmetic.

What strategic buyers actually price

Here is the lesson that took me years inside corporate development to absorb: the model is a floor for the conversation, not the conclusion. A strategic buyer is not pricing your business standalone. They are pricing it inside theirs: the revenue they can cross-sell, the cost they can remove, the capability they no longer have to build, the competitor they can deny. A financial buyer prices a standalone return. These are genuinely different companies in everything but the legal entity, and they will rationally pay very different numbers. If you do not know which kind of buyer is at the table, you do not know the price.

What the data room does not say

Sellers curate. The deck emphasizes strength and routes attention away from weakness. The most valuable diligence often starts with one question: given how this company wants to be seen, what would it least want me to look at? Customer concentration that is technically disclosed but never highlighted. A renewal that is closer and less certain than the narrative implies. A key person whose departure would quietly reprice the whole thing. The silences in a data room are information, and learning to hear them is most of what separates real diligence from confirming a story you already wanted to believe.

The minimum you need before an IC or term sheet

• Three years of normalized financials, with the adjustments explained, not just applied.
• A clear view of revenue quality: recurring vs one-time, concentration by customer, retention.
• The real margin structure and what moves it at scale.
• A defensible comparable set, with the reason each comp belongs and where it differs.
• A sensitivity range, not a single point. The number you cannot defend a range around is a number you do not understand.

When to productize valuation, and when to use judgment

Most of valuation is mechanical: assembling comparables, normalizing financials, running sensitivities. That part should be fast, consistent, and tooled, which is exactly what I built Value Alpha to do. The part that is not mechanical, the judgment about strategy, buyer type, and the things the data room leaves out, is where a human should spend attention. Use infrastructure for the inputs so you can spend your judgment where judgment is scarce. A valuation you can argue with, where the assumptions are visible and the range is honest, is worth far more than a single confident number you have to take on faith.

The one-line version

Price is a judgment, not a formula. Build the inputs rigorously, make every assumption visible, and decide who the buyer really is. The rest is detail.

Go deeper

I write longer on these topics, and I take on a small number of advisory engagements when the decision is live and the number matters.

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