How to Value a Privately Held Company: A Guide for Owners

Understanding the Purpose of Business Valuation

Valuing a privately held company is an important step in many strategic, tax, and planning decisions. Unlike publicly traded companies, private businesses do not have a readily observable market price, which makes valuation a more analytical and judgment-based process.

Business valuation is commonly used for purposes such as ownership transitions, estate and gift planning, shareholder agreements, and long-term strategic planning. This overview is intended for general educational purposes and should be considered in light of individual circumstances.

Defining the Valuation Objective

The first step in any valuation process is identifying why the valuation is being performed. The purpose influences methodology selection, assumptions, and documentation standards.

Common valuation purposes include:

• Business sale or recapitalization planning

• Estate or gift tax reporting

• Shareholder buyouts or disputes

• Capital raising or financing discussions

Clarifying the objective can help ensure the valuation is appropriate for its intended use.

Core Valuation Approaches

Income Approach

The income approach estimates value based on a business’s ability to generate future cash flows. This method often involves discounted cash flow (DCF) analysis, which converts projected future cash flows into present value using a discount rate that reflects business risk.

This approach is frequently used for operating businesses with predictable cash flow patterns.

Market Approach

The market approach compares the subject company to similar businesses that have been sold or are publicly traded. Valuation multiples derived from comparable companies or transactions are applied to relevant financial metrics.

This approach provides a market-based reference point but depends heavily on the quality and relevance of comparable data.

Asset-Based Approach

The asset-based approach calculates value by subtracting liabilities from the fair market value of assets. This method is often used for asset-intensive businesses, holding companies, or situations involving liquidation analysis.

Book values are typically adjusted to reflect current market conditions.

Key Financial and Operational Factors

Several factors influence how a privately held business is valued.

Financial Performance

Historical revenue, profitability, and cash flow trends provide insight into sustainability and growth potential. Adjustments are often made to normalize earnings for one-time or non-operating items.

Industry and Market Conditions

Economic conditions, industry growth trends, and competitive dynamics can influence valuation assumptions and risk assessments.

Business Structure and Risk

Factors such as customer concentration, management depth, supplier dependence, and scalability may affect perceived risk and value.

Discounts and Ownership Considerations

Private company valuations often include adjustments that reflect ownership characteristics.

Common Adjustments

• Discount for lack of marketability: Reflects limited liquidity

• Discount for lack of control: Applies to minority ownership interests

These adjustments depend on ownership structure, governing agreements, and valuation purpose.

Importance of Documentation and Professional Support

Valuations used for tax or legal purposes often require detailed documentation and independent analysis. Qualified valuation professionals help support methodology, assumptions, and compliance with applicable standards.

Professional involvement is particularly important when valuations may be subject to regulatory or legal review.

Integrating Valuation Into Strategic Planning

A business valuation is most useful when incorporated into broader planning discussions, including:

• Succession and ownership transition planning

• Estate and wealth transfer strategies

• Liquidity and retirement planning

• Long-term business strategy development

Periodic updates help ensure valuation data remains relevant as conditions evolve.

Conclusion

Valuing a privately held company is a complex process that combines financial analysis, market context, and professional judgment. Understanding valuation approaches and influencing factors can help business owners engage more effectively in strategic planning conversations.

Because valuation outcomes depend on assumptions and objectives, professional guidance is an important part of the process.

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Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd and Parkview Partners Capital Management are separate entities. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Investing involves risk, including possible loss of principal. The information presented is for educational purposes only and should not be interpreted as individualized investment, tax, or legal advice. Past performance is not indicative of future results. For more information, please review our Form ADV, available upon request.