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How To Value A Private Company: Common Methods Explained
- Legal Sections
- 19 Oct, 2026
Start With Clean Numbers: Normalization
Before applying any method, you need financial figures that reflect how the business really performs. This step is called normalization.
Private company owners often run personal expenses through the business, pay themselves above or below market salary, or have one-off costs and gains that distort a given year. Normalizing means adjusting for these items so the earnings show what a new owner could expect.
Typical adjustments include:
- Owner compensation set to a market-rate salary for the role
- Personal expenses removed (vehicles, travel, family payroll)
- One-time costs or income, such as a lawsuit settlement or asset sale
- Rent adjusted to market if the owner leases property to the business
Every method below depends on this foundation. Poor normalization leads to a poor valuation.
1. The Market Approach: What Are Similar Businesses Worth?
The market approach values your company by comparing it with similar businesses that have been sold or are publicly traded. It is the most intuitive method, since it asks what buyers are actually paying.
Comparable transactions. You look at recent sales of similar private companies, often through transaction databases, and calculate the multiples paid, such as a multiple of revenue or earnings. Applying a comparable multiple to your own figures gives an estimated value.
Comparable public companies. You look at publicly traded firms in the same industry and apply their multiples, then adjust for the fact that your business is smaller and less liquid.
Common multiples:
- EBITDA multiple: The most widely used for mid-sized businesses. EBITDA (earnings before interest, taxes, depreciation and amortization) approximates operating cash flow.
- Seller's discretionary earnings (SDE) multiple: Common for very small, owner-operated businesses. SDE adds back the owner's compensation to profit.
- Revenue multiple: Often used for high-growth or software companies that are not yet consistently profitable.
Strengths: Reflects real market behavior and is easy to explain. Limitations: Truly comparable deals can be hard to find, and details on private transactions are often limited.
2. The Income Approach: What Will the Business Earn in the Future?
The income approach rests on a simple idea: a business is worth the cash it will generate in the future, expressed in today's money.
Discounted cash flow (DCF). You forecast the company's free cash flow for several years, estimate a terminal value for the years beyond, and discount everything back to the present using a rate that reflects risk. The riskier the business, the higher the discount rate and the lower the value.
Capitalization of earnings. A simpler version for stable businesses. You take a single normalized measure of earnings and divide it by a capitalization rate, which reflects required return and expected growth.
Strengths: Captures the specific growth, margins and risks of your business rather than relying on other companies. Limitations: Highly sensitive to assumptions. A small change in the growth rate or discount rate can swing the result dramatically, so forecasts need to be realistic and well supported.
DCF is usually the best fit for companies with predictable cash flows or a clear growth trajectory, and less useful for very early-stage businesses where forecasts are largely guesswork.
3. The Asset-Based Approach: What Is the Business Worth Underneath?
The asset-based approach values the company by what it owns minus what it owes.
Adjusted net asset value. You restate assets and liabilities to fair market value instead of the book value shown on the balance sheet. Real estate, equipment and intangible assets are often worth quite different amounts than their accounting figures.
Liquidation value. You estimate what the assets would fetch if sold off and the business closed, after paying debts and costs. This sets a floor value.
Strengths: Well suited to asset-heavy businesses, holding companies, real estate firms and companies that are struggling or winding down. Limitations: Ignores the earning power and goodwill of a profitable operating business, so it tends to understate value for service, tech and brand-driven companies
Which Method Should You Use?
In practice, professionals rarely rely on a single method. They apply two or three and compare the results. A typical pairing is a market approach using EBITDA multiples cross-checked against a DCF, with an asset-based figure as a floor.
A rough guide:
- Stable, profitable small or mid-sized business: Earnings multiples plus capitalization of earnings
- High-growth company: DCF and revenue multiples
- Asset-heavy or distressed business: Asset-based approach
- Startups: Market-based comparisons and investor negotiations, since forecasts are uncertain
Value Versus Price
A valuation is an informed estimate, not a guarantee. The price a business actually sells for depends on negotiation, buyer synergies, deal structure, market conditions and how many serious bidders are at the table. A strategic buyer who can cut costs or cross-sell to its existing customers may pay more than a financial buyer.
Final Thoughts
Valuing a private company is part science and part judgment. Start with clean, normalized financials, use more than one method and be honest about the assumptions behind your numbers. For a major decision such as a sale, merger or investment round, bring in a qualified valuation professional or M&A advisor. A well-supported valuation not only guides your decisions but also gives buyers and investors confidence in your numbers.
Considering selling or raising capital? Getting a professional valuation early shows you where your business stands and what to improve before you go to market.