How to Value Private Companies using Multiples and Discounted Cash Flow Analysis

Abstract

In this paper we outline how to value private companies and work through a real case study. The corporate finance and valuation techniques on display can be used to value any private company or project that is illiquid with little or no market data. Together with this paper we provide the full background information for the case study, including consolidated balance sheet, cash flow and income statements and an Excel workbook with a full valuation breakdown . Two valuation approaches are presented. The first approach is called ‘multiples’ and requires we first identify sensible comparable companies with public data and can serve as a reasonable proxy for our underlying firm or project. Known proxy enterprise values are converted into multiples of EBITDA and extrapolated to value the private company or project of interest. Enterprise value can be measured as a multiple of sales, earnings, EBITDA, EBIAT and many income factors. Typically practitioners measure enterprise value as a multiple of EBITDA to exclude sales margin, capital structure, debt and leverage and other idiosyncratic biases. The second valuation method takes a discounted cash flow (DCF) approach. This approach is forward looking; it projects and values the future cash flows of a company. This method lends itself to richer analysis compared to the multiples approach, but relies heavily on assumptions surrounding cash flow projections, growth rates and the weighted average cost of capital (WACC). The WACC acts as a yield or discount factor and is required to value the cash flows of the firm or project (Burgess, 2020). Finally we compare the prices from several different approaches to arrive at a suitable price range. It is important to note that all approaches involve assumptions and approximations of some kind. Therefore practitioners seek to establish a reasonable price range rather than a single price. Transactions however must take place at a single price and law suits are a popular commonplace negation tactic to squeeze for additional value.