Value shares in private companies

 

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.

 

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