Discover how to accurately determine a company's worth with our guide to valuing a private company. Learn key methods, real-world examples, and pitfalls.
Figuring out what a private company is worth isn't as simple as looking up a stock price. It's a blend of art and science, using methods like Discounted Cash Flow (DCF), market comparisons, and asset-based appraisals to arrive at a solid estimate. This valuation is a critical piece of the puzzle for everything from raising money and planning mergers to simple strategic planning, giving a defensible number for a business that doesn't trade on a public exchange.
Valuing a private company feels less like checking the stock market and more like appraising a rare piece of art. There's no daily ticker to consult and no crowd of Wall Street analysts broadcasting their opinions. Instead, the company's value is a carefully built estimate, pieced together from its performance, its potential, and where it stands in the market. For everyone at the table, this is a high-stakes game.
For founders, a strong valuation is the foundation of any fundraising effort. It directly dictates how much of their company they have to give away to secure the capital they need to grow. For investors, it's how they make smart bets and justify those headline-grabbing "unicorn" price tags. And for employees with stock options, that number has a very real impact on their personal wealth.
The financial world has fundamentally shifted. We're seeing more companies stay private for much longer, quietly building massive value far from the public spotlight. This isn't just a minor trend; it has completely reshaped the investment landscape.
According to data from Morningstar, the median age for a company going public has crept up significantly, from 6.9 years back in 2014 to 10.7 years today. This longer runway means businesses are reaching a whole new level of maturity before ever listing on an exchange. The result? There are now over 1,300 private "unicorns"—companies valued at over $1 billion each—with a mind-boggling collective value of $4.5 trillion. You can dive deeper into this phenomenon in the global investor survey from Adams Street Partners.
This shift means that a huge portion of modern wealth creation happens behind closed doors. Understanding how to measure that value is no longer a niche skill—it's essential for anyone in the innovation economy.
A solid valuation is far more than just a number on a spreadsheet; it's a powerful strategic tool. It creates a common ground for negotiation and helps guide major decisions. Whether you're a fund manager sizing up a new deal or a founder gearing up for a sale, a credible valuation is the anchor for every move you make.
Here’s why getting the number right is so critical:
Ultimately, a well-supported valuation delivers the clarity and confidence needed to make smart decisions in the often-murky world of private market deals.
Valuing a private company isn’t some dark art practiced only by financial wizards in corner offices. It's a structured process built on a few core, logical methods. A great way to think about it is like figuring out the value of a house—you can look at it from a few different angles to build a complete picture. The same holds true for a business.
Each method offers a unique perspective on a company's worth, and seasoned professionals rarely, if ever, rely on just one. Instead, they typically use a combination of these approaches, blending the results to arrive at a defensible valuation range.
Let's break down the three fundamental pillars of this process.
The Discounted Cash Flow (DCF) method gets right to the heart of the matter by focusing on what a company is worth on its own, based purely on its ability to generate cold, hard cash in the future. It’s arguably the most fundamental of the three methods because it aims to calculate a company's intrinsic value.
Imagine you’re buying an investment property. The real value isn't just the building itself, but the future rental income it will produce. DCF analysis does the exact same thing for a business: it projects all the future cash the company is expected to generate and then "discounts" that cash back to what it's worth in today's dollars. After all, a dollar earned ten years from now is worth less than a dollar in your pocket today.
This method is powerful because it's grounded in the company's specific financial projections, not just fleeting market sentiment. However, it's also highly dependent on assumptions about future growth rates and risk, making it as much an art as it is a science.
This approach, often called "Comps," shifts the focus from intrinsic value to relative value. Instead of looking inward at the company’s own cash flow, it looks outward to see what similar, publicly-traded companies are worth right now.
Let's go back to the house analogy. One of the first things you’d do is check the listing prices of other similar homes for sale in the same neighborhood. Comparable Company Analysis is the business equivalent. Analysts identify a group of public companies that are similar in industry, size, and growth profile. They then calculate valuation multiples—like EV/EBITDA or EV/Revenue—and apply those market averages to the private company's own financials.
Key Takeaway: Comps provide a real-time snapshot of how the public market is currently valuing businesses in a specific sector. This makes it an excellent reality check against the more theoretical DCF model.
This is where understanding a company's financial statements becomes critical. Analysts use key metrics from those statements as the foundation for applying market multiples.
The image above highlights how different layers of profitability, from revenue down to net income, can be used. The choice of which metric to use depends on the industry and the specific circumstances of the company being valued.
Our third method, Precedent Transactions, is also a form of relative valuation, but with a crucial twist. It answers a slightly different question: what have buyers actually paid to acquire similar companies in the past?
Sticking with our house analogy one last time, this is like looking at the sales records for homes that have recently sold in your area. It’s not about the asking price; it’s about the final closing price. This method involves analyzing recent merger and acquisition (M&A) deals involving companies comparable to the one being valued.
This approach often results in the highest valuation of the three methods. Why? Because it typically includes a control premium—the extra amount a buyer is willing to pay to gain full control of a company's operations and future. The main challenge is finding truly comparable transactions and accounting for the specific deal dynamics that may have influenced the final price. For fund managers at firms like Fundpilot, understanding these premiums is vital for assessing potential exit values for their portfolio companies.
To help you keep these methods straight, the table below provides a quick side-by-side comparison. It's a handy reference for understanding the basis of each approach, where it works best, and its primary limitations.
| Methodology | Basis of Valuation | Best For | Primary Challenge |
|---|---|---|---|
| Discounted Cash Flow (DCF) | Company's future cash-generating ability (intrinsic) | Valuing mature, stable companies with predictable cash flows. | Highly sensitive to assumptions about growth, margins, and discount rates. |
| Comparable Analysis | Public market value of similar companies (relative) | Getting a real-time market pulse; valuing companies in established sectors. | Finding truly comparable public companies; market sentiment can be volatile. |
| Precedent Transactions | Prices paid in past M&A deals (relative) | Determining a potential sale price or "M&A value," including a control premium. | Finding relevant deals; transaction prices can be skewed by deal-specific factors. |
Ultimately, no single method tells the whole story. A thorough valuation will incorporate insights from all three, using each one as a check on the others to triangulate a fair and supportable value for the private company.
Alright, let's roll up our sleeves and get into the engine room of valuation: the Discounted Cash Flow (DCF) analysis. The core idea here is actually pretty simple. A company's true worth is just the sum of all the cash it's expected to produce in the future, but with a crucial twist—we adjust that cash to what it's worth in today's money.
Think of it like buying a small farm. Its real value isn't just the price of the land and the equipment. It’s the money you'll make from selling crops, season after season, for years to come. DCF does the same thing for a business, helping us pin down its fundamental, or intrinsic, value based on its ability to generate cold, hard cash. It forces you to look forward and really think about the company’s long-term health and potential.
The first real step in building a DCF model is forecasting the company's Free Cash Flow (FCF), usually for the next five or ten years. This isn't just about plugging in a rosy revenue number. It's a detailed look at the cash a company generates from its operations after paying for all the investments needed to maintain and grow its business.
For a private company, this is a bottom-up exercise. You're building your forecast based on a few key ingredients:
Let’s imagine we're looking at a B2B SaaS company. An analyst would start by projecting its annual recurring revenue (ARR) growth, factoring in customer churn, and estimating gross margins. From there, they'd forecast operating costs like R&D and sales. Finally, they'd budget for future investments—things like new servers or software—needed to support that growth. The result is a series of FCF estimates, one for each year in your forecast.
Once you have those future cash flow numbers, you need to figure out what they're worth today. This is where the discount rate comes in. It's a percentage that accounts for two things: the time value of money (a dollar today is worth more than a dollar next year) and the risk of the investment. The riskier the business, the higher the discount rate.
The discount rate is arguably the most subjective—and most critical—input in a DCF analysis. A small change in this rate can have a dramatic impact on the final valuation.
Nailing down this rate is especially tricky for a private company. Without a public stock price to measure volatility (beta), analysts often turn to the Weighted Average Cost of Capital (WACC). This formula blends the cost of the company's equity and its debt to get a single number representing its overall risk profile. For very young companies with no debt, the discount rate is just the cost of equity, which is often estimated by looking at the returns venture capitalists expect from similar investments.
Let's be realistic: no company grows at a blistering pace forever. Eventually, things stabilize. The Terminal Value (TV) is our best guess at the company's value beyond that initial forecast period (say, after year 5). It captures the worth of all cash flows from that point on into the distant future, assuming the business has settled into a mature, steady state.
There are two main ways to calculate this:
The biggest knock on DCF is that it’s built on a pile of assumptions. Future growth rates, profit margins, and market shifts are all just educated guesses, after all. This is why no seasoned analyst ever relies on a single DCF number. Instead, they use scenario analysis.
This simply means building out a few different versions of the model to see how the valuation holds up under different conditions:
By creating these different scenarios, an analyst can provide a valuation range instead of one potentially misleading number. This gives founders and investors a much more realistic and defensible starting point for making big decisions.
While a Discounted Cash Flow (DCF) analysis is all about looking inward at your company's future potential, market-based approaches look outward. They ask a much more direct question: what is the market actually willing to pay for a business like yours right now? This is the essence of relative valuation, a method that keeps your valuation grounded in real-world market activity.
Think of it this way. DCF is like estimating a home's value by calculating all the rental income it could generate over the next 30 years. It's a solid, fundamental approach. Relative valuation, on the other hand, is like walking down the street and checking the sale prices of similar houses that just sold. It's immediate, practical, and provides a crucial reality check. This entire approach revolves around what we call market multiples.
When you're using market-based valuation, you're essentially comparing your company to others. This is typically done in two distinct ways, each looking at a different "peer group."
Comparable Company Analysis (Comps): This is where you find a group of publicly traded companies that look a lot like yours in terms of their industry, size, and growth profile. You then dig into their valuation multiples and apply those market averages to your own company’s numbers.
Precedent Transactions: This method shifts the focus to recent merger and acquisition (M&A) deals. It specifically looks at what buyers have actually paid to acquire businesses similar to yours.
In practice, you'd never rely on just one. An experienced analyst will use both to create a valuation range, which gives a far more complete and defensible picture of what a company is truly worth.
Often called "Comps," this is the go-to method for getting a live pulse on how the public market is valuing companies in your sector. The first step is the most critical: identifying a solid peer group of public companies. The key here is to find businesses that are genuinely similar—not just in what they do, but in their financial DNA.
Once your peer group is set, you calculate their key valuation multiples. The most common ones you'll see are:
Let's imagine the median EV/Revenue multiple for your peer group is 7.0x. If your private company is pulling in $10 million in annual revenue, a straightforward Comps valuation would point to an Enterprise Value of $70 million.
Of course, it's rarely that clean. You'll always need to make adjustments to account for differences in growth rates, profit margins, and the overall risk profile between your company and its public counterparts.
Key Insight: Public market data offers a powerful benchmark, but it’s not a perfect mirror. A private company almost always requires a discount for its lack of marketability—after all, you can't sell private shares with the click of a button like you can with public stock.
While Comps show you how the public market is trading similar companies, Precedent Transactions reveal actual takeover prices. This method is incredibly valuable if you're thinking about a potential sale because it reflects what a strategic buyer might be willing to pay to own your business outright.
The process feels similar to Comps. You find a list of recent M&A deals involving comparable companies, calculate the multiples that were paid in those transactions (like EV/EBITDA), and then apply those multiples to your own company's financials.
The big difference is that these multiples usually include a control premium—that's the extra amount an acquirer pays to gain full control of a company. Because of this, valuations derived from Precedent Transactions often come out the highest. The main hurdle, however, is that data on private M&A deals can be tough to track down and might not include enough detail to make a truly fair comparison.
Valuation trends can also swing wildly depending on a company's stage and sector. For example, recent market data shows that median Series A valuations have climbed to $49 million, getting close to historic highs. In the software world, indicators like the SaaS Capital Index show that private SaaS companies are seeing median valuation multiples around 7.0 times their current annualized revenue, suggesting the market is stabilizing. You can dive deeper into these private company valuation trends in this detailed report.
Valuing a private company isn't just a numbers game. It's an art that blends financial modeling with a deep understanding of real-world complexities. Private businesses live in a different universe than their publicly traded cousins—they’re less liquid, often have concentrated ownership, and their financial data can be, shall we say, a bit messy. These hurdles mean you can’t just plug numbers into a formula and call it a day.
Think of an initial valuation from a DCF or comps analysis as the "sticker price." It’s a solid starting point, but it doesn't reflect the specific conditions of a private company. To get to the real price, we have to make adjustments. The two most important are discounts for lack of marketability and lack of control, which are designed to account for the unique disadvantages of owning private shares.
You simply can't sell a private company share with the click of a button like you can with Apple stock. This illiquidity has a very real impact on value, and as an analyst, you have to quantify it.
Discount for Lack of Marketability (DLOM): This is the big one. Imagine you own a piece of prime real estate. Now imagine an identical property, but you can only sell it on the third Tuesday of a month with a "Z" in it. Which one is worth more? The one you can sell anytime, of course. The DLOM is the percentage discount you apply to a private company's value to reflect the fact that finding a buyer and closing a deal can take months, or even years.
Discount for Lack of Control (DLOC): This discount comes into play when you’re valuing a minority stake. If you own 10% of a company, you can't fire the CEO, sell the business, or even dictate the color of the office walls. That lack of decision-making power makes your shares less valuable than a controlling stake. DLOC adjusts the valuation to reflect this reality.
Applying these discounts isn’t optional—it’s essential. Skipping them will almost always lead to an overinflated valuation that doesn’t hold up to scrutiny. The exact percentages will vary based on the company's specific situation, industry standards, and any shareholder agreements in place.
Another massive headache in private valuation is the quality of the data. Public companies have to file audited financials, but a private firm might have sloppy bookkeeping or management forecasts fueled by pure optimism. This is where a healthy dose of professional skepticism becomes your most valuable tool.
When you're looking at unreliable financials, the game shifts. You have to move beyond just crunching the numbers and start questioning the assumptions behind them. It’s about digging in, asking hard questions, and trying to triangulate information from different sources to build a story you can actually believe.
This problem gets turned up to eleven when you’re dealing with pre-revenue startups. How do you value a brilliant idea with no sales to its name? Traditional methods like DCF fall apart completely. You have to get more creative and turn to alternative approaches:
These methods are far more subjective, focusing on future potential rather than past performance. This is precisely why a rigorous due diligence process is non-negotiable. To get a better sense of what that involves, you can explore our expert due diligence checklist template. Successfully navigating these challenges is what separates a truly defensible valuation from a wild guess.
You can't value a private company in a bubble. The final number is a living thing, pushed and pulled by forces well beyond the company's direct control. It’s a lot like sailing—your engine power (the company's fundamentals) is crucial, but so are the ocean currents and wind (the market conditions). Major economic shifts, interest rate hikes, or even just a change in industry sentiment can significantly move the needle on what your business is worth.
At the same time, a company's valuation is tied directly to its final destination—the exit strategy. Whether you're planning a strategic sale to a competitor (M&A) or dreaming of an Initial Public Offering (IPO), the health of those exit markets casts a long shadow on today's valuation. An investor cutting a check today is always, always thinking about how they'll get that money back (and then some) down the road.
The potential exit isn't just a far-off goal; it's a critical piece of the valuation puzzle right now. It fundamentally shapes the story you tell and the assumptions you plug into your financial models.
For example, a company gunning for an IPO might be valued using aggressive revenue growth multiples. But a company aiming for a strategic buyout might be valued on how its tech can supercharge the acquirer's profits. This forward-looking view is absolutely essential.
The strength of the M&A market or the public's appetite for new stock offerings directly influences the multiples and terminal values used in your calculations. This transforms valuation from a simple math problem into a dynamic, strategic exercise. When you're fundraising, you have to paint a clear picture of this future path—it’s a cornerstone of any compelling pitch. You can see how this narrative is built by reviewing an effective investment memo template for VC funding.
The overall exit environment—how easy or hard it is for investors to cash out—has a massive effect on valuations. The amount of "dry powder" (uninvested cash held by VC and PE firms) and the number of active exit routes create a powerful liquidity cycle.
While private equity deal value recently hit a two-year high, the exit environment has been sluggish. This creates a bottleneck. Even with a lot of capital ready to be deployed, liquidity is tight for many private companies because IPO and M&A activity is only improving slowly. You can discover more about how the liquidity cycle influences private equity in the 2025 outlook.
This interplay means valuing a private company goes far beyond its balance sheet. It demands a sharp assessment of market liquidity, investor sentiment, and how realistic those future exit paths really are. A fantastic company in a frozen exit market will face serious valuation headwinds.
Ultimately, a truly smart valuation acknowledges these outside forces. It understands that the number on the page is just a snapshot in time, reflecting not just the company’s inherent strengths but also its place within the broader financial ecosystem.
Even when you feel you have a solid handle on valuation, a lot of specific questions tend to bubble up during the actual process. Valuing a private business is full of unique situations and jargon that can easily trip you up.
Here are some straightforward answers to the most common questions we get, designed to clear up any confusion and solidify your understanding.
This is the classic valuation puzzle. How do you measure something that has no financial history? Methods like DCF fall flat when there's no revenue or cash flow to analyze. The entire focus has to pivot from what the company has done to what it could do.
Instead of crunching historical numbers, analysts look at qualitative factors and potential. The valuation becomes a story about the company's foundational strength and its place in the market.
Here are a few common approaches for these early-stage businesses:
These two terms are at the heart of every valuation, but they tell very different stories. Mixing them up can lead to some serious misunderstandings about what a company is truly worth. A simple way to think about it is the total price of a house versus the owner's actual equity after the mortgage is paid.
Enterprise Value (EV) is the total value of the entire business, representing the claim of every stakeholder—both lenders and owners. It’s often considered the theoretical "takeover price" because it's what you'd have to pay to buy the whole company, its assets, and its debt.
Equity Value, on the other hand, is the portion of the company's value that belongs only to the shareholders. It’s what would be left for them after every single debt was paid off. To get it, you start with the Enterprise Value, subtract all the debt, and then add back any cash the company holds.
There isn't a one-size-fits-all answer here. The right frequency depends on a mix of compliance needs and strategic milestones. As a baseline, every private company should get a formal valuation done at least annually. This is often a necessity for financial reporting or for 409A valuations, which are critical for setting the strike price for employee stock options.
Beyond the annual check-up, a valuation is essential during several key moments:
A fresh valuation is often the first step before a period of intense financial review. For a closer look at what follows, you can learn more about the due diligence process in our complete guide.
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