How can a layman come up with a rough but reasonable valuation for a private company?

July 25, 2006 9:25 AM

How can a layman come up with a rough but reasonable valuation for a private company? Assume access to information a typical employee of the company would have, plus overall revenue and profit history, maybe value of significant assets, if any.

This doesn't have to be watertight. Getting a figure that's likely to be in the same order of magnitude is just fine. Getting a figure that's likely to be within +/- 25% would be beyond expectations. This is mostly to settle some curiousity among several of my co-workers and I who have been talking about the value of stock options we hold.

posted by wildblueyonder to work & money (4 comments total)

As a starting point, see what the Price to Earnings ratio is for similar public companies and use that against your own company's earnings.
posted by justkevin at 9:33 AM on July 25, 2006

this is partly what i do for a living... valuing unlisted co's. I'm UK-based, but the principles are fairly universal

if you have stock options, they probably have a method of valuation either in there or in the companies documents - they'll have anticipated that at some point someone will want their shares bought out & prescribed how this is to be done.

Failing that, its back to first principles. What industry are you in? - some industries have "rules of thumb", but most, its a multiple of the distributable profits, with the multiple depending on the size of the business - as justkevin says, look at the p/e ratios of similar but listed companies then apply that to the likely future earnings of your company (which will be based on historic & foreacst earnings), then discount by 40%, 50%, 60% to take account of your shares not being listed, not giving control of the company etc etc.

If your company pays dividends on its shares, then the value of the share is theoretically the future dividend income divided by the expected rate of return of the investor (taking into account how risky the share - so you start at a risk free gov't bond rate of return & beef it up for risk)

Thing is, its a black art. And it gets blacker if you are in technology. Or if you're loss making (no future profits doesn't equal no value)

Don't know if I've moved you much further forward, but there can be so many variables (is your company thinking of listing soon? does it have a killer product or service coming? premiums for these)

If you want to send me more info, feel free & I'll happily have a look at it for you.... emails on my profile.
posted by khites at 9:48 AM on July 25, 2006

My father used to broke small businesses like card shops, strip clubs, pizza joints etc. If it is a small cash oriented business, the first step is to spend a few days with the owner or manager and see what he takes in cash. His books are going to be way understated. See what the family runs through the place such as a car for junior or gas for the wife.

Then the value is usually 1.5 to 3 times real earnings.
posted by JohnnyGunn at 10:26 AM on July 25, 2006

If you are looking for a source you can cite, I recommend Shannon Pratt's books. Either Valuing A Business or Valuing Small Businesses and Professional Practices would be most appropriate for your purposes.
posted by GarageWine at 2:36 PM on July 25, 2006