It is easy to arrive at a valuation of a publicly-traded company. We need to just multiply its stock price by its outstanding shares. But a valuation for private companies is a little more difficult. Private companies do not report their financials and are not listed on stock exchanges. They are also not governed by the stringent accounting rules that cover public limited companies.
Based on the available data, the market value of private companies can be determined based on three broad valuation methods.
Comparable Company Analysis or the relative value model
This is done by an analysis of the financials of a company in the same industry, and of a similar size. The value is determined based on data that is available publicly. Sometimes, a group of companies from the same industry, having the same profile, characteristics and size is taken and their multiples (cash flow, assets, performance, growth etc.) are used to arrive at an industry average.
The multiples can vary but most analysis is based on the EBIDTA average (Earnings before interest, tax, depreciation and amortization).
The value then is determined by applying a formula of the ratio of the total price to earnings multiples of the comparable companies.
Another method used to determine valuation is the total assets value, where all the company’s assets are added up (based on a fair market value price) to get the intrinsic value. Intrinsic value is based only on the fundamentals of the company that is its cash flow, growth rate, and dividends.
Another way to get the intrinsic value is on the past transaction values of similar companies or the said company to arrive at a fair figure.
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