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How do you determine the value of a private company?

Often we will want to discover how much a private company is worth (aka private company valuation). There is no precise way of doing this, but plenty of accepted means of making estimates. The most common for our purposes is based on a multiple of sales, determined by industry statistics. This method is widely used by screening services.

Rules-of-thumb/multiple of sales method:
One good tool is BizStats rules of thumb page.

Scroll down the page and select the firm's industry category. Read across to the multiple of sales figure, read as a percentage of sales. In the sample case of a grocery store, it says 11% - 18% of annual sales + inventory. So if the grocery store had $500M in annual sales, the firm would be worth between $55M to $90M, plus the value of the inventory.

BizStats also provides some guidelines on what the net income to a business owner might be for certain businesses. For that information, visit the BizStats home page.

Also, Inc. magazine provides an annually updated business valuation table that is quite useful.

(Thanks to Elaine Lotto of Development Research Systems for providing updated links to the above two sources.)

Keep in mind that there is an entire financial consulting industry built around private company valuation, employing CPAs, attorneys and statisticians who spend a good deal of time and earn a good deal of money to make business valuations. So don't expect, as a busy prospect researcher, to do anything more than a rough, back-of-the-envelope estimate. Using a rule-of-thumb approach such as multiple of sales is highly recommended. But there are other accepted methods, as follows.

Comparable firm method:

Like a home up for sale, a private company's value is not a sure thing until it is actually sold. And just as in the real estate field, a researcher can look at comparable properties to get a feel for what the business may be worth.

Find a publicly traded company, in the same industry, with comparable revenue and number of employees. Find that company's total market capitalization. You are almost there. Now you have to discount the value of the private firm somewhat. That is because a privately held firm is not as liquid as a public company. That means that the owners can't easily convert their ownership into cash, as a public company stockholder can quickly do by selling shares. Other factors could come into play as well, such as cost of borrowing.

Another source of info is David Lamb's Prospect Research Page on Companies and Executives, which provides a good source of industry data, as well as databases of businesses for sale -- good for gauging what a comparable business is worth. David also created a presentation on private company valuation.

Also, see:


INC. magazine's charts, tables and worksheets which help in valuations.

Other resources: