Valuation Multiples For Private Companies

How you get valuation multiples for private companies is similar to how you get valuation multiples for public companies, but with one additional step. 

In short, the first step is to find the valuation multiples for public companies in the same industry that your private company is in. Then, you apply a discount to the multiple for the fact that the private company is illiquid. I’ll explain below how this is done.  

This is the most reliable method, because private companies don’t release their data when they get bought or sold, so there’s no way to know what the valuation multiples for private companies are unless they report them. 

As a result, you have to use a proxy of public company valuation multiples.

Step 1: Identify Valuation Multiples For PUBLIC Companies in the same industry

You can find the valuation multiples for public companies in various ways. The easiest way to do it is by looking it up in a list by industry. 



NYU’s Professor Damodaran is gracious enough to provide this data that is updated every few months. (He is the same Professor I talk about all the time on my blog, and the author of the little book of valuations that I reviewed.)

  • For revenue multiple (i.e. price to sales) by industry, you can look it up here
  • For EBITDA and operating income after tax (i.e. EBIT*(1-tax)) multiples, you can look it up here

For example, say the private company you want to value using valuation multiples is in the food distribution industry. 

When I click on the EBITDA multiple link, the list doesn’t have a food distribution industry. So, I have to use a couple proxies. 

According to the EBITDA multiple list, the closest industries are retail distributor industry with an EBITDA multiple of 13.88x and food wholesalers with an EBITDA multiple of 15.87x. As an average, let’s say the EBITDA multiple for a food distribution company is 14.5x. 

Alternative Step 1: Public Companies Multiples With Data Set

The pro of using the Damodaran multiples in the links above is that you can just look up the multiple in the list. But the downside is that it doesn’t provide you with a dataset of the companies that were used to get the valuation multiples. 



If you’re looking for a dataset as well, then you’ll have to take the longer approach to get to the valuation multiples. 

You can learn how to do that in my relative valuation post here. Or, here’s a more short cut way I explain here

Step 2: Apply A Discount 

The second and final step is to apply a discount to the valuation multiple that you found for public companies in step 1. 

The reason why you apply a discount is because private companies are considered harder to convert to cash. In other words, it is illiquid. 

For example, if you own $100,000 worth of a public company stock, you can sell the shares you own by selling them on the stock market. 

On the other hand, if you own $100,000 worth of a private company equity, unless there is a willing party, you can’t sell your share. 

For that reason, you apply an illiquidity discount. 

According to Damodaran, 20% – 30% discount is applied to private companies as an illiquidity discount. However, in my professional experience valuing companies, I have seen private companies valued at an illiquidity discount as low as 10%. 



How much discount you apply to a private company depends on how illiquid the company is. There is no hard and fast rule, but some key factors are:

  • The smaller the private company, the higher the illiquidity discount – use 30%
  • The closer the private company is to becoming public, the lower the illiquidity discount – use 10% – 15%
  • The more asset heavy the company is, the higher the illiquidity discount – use 30%

Putting It Altogether In The Example

Let’s go back to our food distribution example. In our step 1, we found that a 14.5x EBITDA multiple is used for public companies in similar industries. 

Let’s also say that this food distribution company has about $20 million in annual revenue, it has started talks with investment banks about IPO in the next year, and the company uses a fleet of trucks for distribution. 

The profile of this company is that because it’s private, we would generally expect an illiquidity discount that is between 20% – 30%. Since the company is pretty small compared to large public companies on the stock market, the discount should be on the higher side at around 30%. 

We also know that the company has plans to go public, so that would reduce the discount down by a little, so let’s say we’re at about 25%. 

Then another piece of information we have is that the company has a fleet of trucks on its books, since it’s a distribution company. 

Heavy equipment like machinery or real estate buildings would cause this company to be asset heavy. A fleet of trucks can be argued to be asset heavy as well, but it can also be argued as not so asset heavy, because trucks can be sold for at least their salvage value. In this case, we can consider the trucks to be picked up by competitors, and thus, we don’t have to increase the illiquidity discount. 



So, an illiquidity discount of 25% can be a hypothetical number to apply to the 14.5x EBITDA. That brings down our EBITDA to a discount-adjusted EBITDA of 10.9x. 

Summary

To summarize, you don’t have to sweat about getting valuation multiples for private companies, because you have all the tools to do so. 

You just need to know how to get valuation multiples for public companies as a proxy (which you can grab from the list that Professor Damodaran provides or you can calculate your own using the method I show). 

Then, you can think about whether the private company you’re trying to value has the factors that make it very illiquid and apply an illiquidity discount between 20% – 30% to the public companies valuation multiple for the industry that the private company is in. 

Get in there and try it; it’s simple. If you have any questions, leave me a comment. I hope you found this helpful and good luck! 

2 thoughts on “Valuation Multiples For Private Companies”

  1. Cristiano Castellano

    Hi,

    What about premiums to pay to get control? Trading multiples do not account for premiums (that are instead included in transaction multiples). However as you say in small software companies there are no track records of deal values so the question would be how to assess the % to add to include the premium

    Thanks

    1. microcap.co

      That is a really good point, Cristiano, and for sure, you should think about whether there is a control premium when a company is getting acquired (whether it is private or public). Unfortunately, I was taught that control premiums aren’t as simple and therefore, there isn’t really a set percentage you can apply, because it depends not only on the industry, but also on the specific company. Professor Damodaran teaches this notion here: https://pages.stern.nyu.edu/~adamodar/pdfiles/country/controlvalue.pdf. In my corporate job where we pumped out valuations of companies in M&A transactions like a factory, there were some valuations where we put 0% for control premium and up to 30% for control premium. For example, a real estate company that I valued garnered a 25% control premium vs. a digital agency garnered 0% for those specific transactions. So, I believe it is more of an art than science and very specific to the company you’re valuing IF it’s for the purpose of an acquisition/transaction. For that reason, it’s a good thing to think about, but not a must-have when valuing a company in a simple approach as a starting point. As I mention in all of my posts, these valuation approaches should really be thought of as initial starting points, and there should be more extensive work done if the company is going through a buying/selling process. And if that’s the case, another resource to think about is the Factset Mergerstat Review – they do analysis on control premiums. Too expensive for me to purchase for writing simplified approach posts, but it’s a legitimate resource that valuation experts use when prepping a company for a sale. Thanks for your input, Cristiano!

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