Unlike public companies whose share prices are widely available, private companies are difficult to value. The most common method, and easiest to use, is to compare valuation ratios for a private company against those for a comparable public company.
Suppose your private company and a similar-sized public company make widgets. If the public company has a price-to-earnings ratio of 15, its investors will pay $15 for every $1 of the company’s earnings per share.
Apply the same ratio to your company. If its earnings are $2 per share, you could multiply it by 15 and get a share price of $30. If you own 10,000 shares, your equity stake is worth about $300,000. Many other ratios, including book value and operating income, can be compared in the same way.
Another popular method is discounted cash flow, which discounts future free cash flows by a certain rate to calculate its present value. But this is more complex than a comparative analysis because it requires many educated guesses, such as forecasting future operating cash flows.