Our valuation model

The valuation of private companies has always been a conundrum. Even with the accessibility to a company’s statements, the inability to capture the market’s sentiment makes it hard to estimate a market value. Keeping this constraint in mind, the model exhibits an applicable way of calculating an enterprise value of a private company. This valuation model can be applied by a company owner or by a prospective buyer/seller.

Private companies’ valuation, like public companies, differ by country and sector. For example: A private shipping company in Mexico will have a lower value than its counterpart in the USA. This difference can be attributed to factors like labour cost and country risk. Similarly, the valuation multiple will be lower for a capital-intensive manufacturing firm than a firm in the Fintech space. This variation is mainly due to the cost structure and the current market sentiment for a sector. The model’s first two entries capture these two aspects.

Consequently, the model uses country and sector specific multiples on the inputted revenue and operating profit figures to get to a value. However, public companies have the benefit of higher liquidity and an inherent economy of scale that are not enjoyed by private companies. Thus, the calculated value is discounted by an illiquidity premium and a size premium to get an estimated valuation.

Using the accounting identity, the model subtracts the inputted debt from the value to get an estimated equity valuation. The calculated range between which the valuation will lie in is displayed at the end.